Cathie Wood Keeps Buying Netflix Stock. Should You?
One of the things I like best about Ark Invest’s Cathie Wood and her investment style is her embrace of disruptive technology. Companies that are at the forefront of changing how we do basic tasks or how we think about things make interesting investments because if they strike gold, the resulting returns can be huge.…
One of the things I like best about Ark Invest’s Cathie Wood and her investment style is her embrace of disruptive technology. Companies that are at the forefront of changing how we do basic tasks or how we think about things make interesting investments because if they strike gold, the resulting returns can be huge. She built an entire exchange-traded fund (ETF) around the idea—the ARK Innovation ETF (ARKK), which holds U.S.-listed companies that are “focused on disruptive innovation.”
So it’s no surprise that Netflix (NFLX) is a stock that often moves in and out of Wood’s portfolios. The streaming company completely revolutionized how we watch television by first taking on Blockbuster and other brick-and-mortar video store rental businesses by offering DVD rental by mail. It then advanced to a streaming service so people can take in content any time they want and introduced convenient apps so you can watch on your TV, tablet, computer, or phone. It was one of the first that successfully offered critically acclaimed original programming and, more recently, has evolved into a place to watch live sports.
Wood turned her attention back to Netflix recently, buying about 26,000 shares valued at $2.5 million through another of her ETFs, the Ark Next Generation Internet ETF (ARKW). The purchase follows a $7 million buy in January.
The purchase is also interesting in the timing—Wood bought shares on April 16, which is the same day that Netflix stock dropped following an earnings report that investors found disappointing. Netflix dropped 10% following its first-quarter earnings report as the company projected slower growth in the coming months.
Should investors follow Wood’s lead? Or is the slowing growth an indication that Netflix stock is ready to take a breather?
Netflix, which is headquartered in Los Gatos, California, is a leading streaming service, maintaining a dominant market position even as other services from Apple (AAPL), Amazon (AMZN), Paramount Skydance (PSKY), and Walt Disney (DIS) entered the mix. Netflix today has a market capitalization of nearly $400 billion.
Shares have been a disappointment in recent weeks, however, with a drop throughout the first part of the year pushing Netflix shares to a 5% loss—a return that’s worse than all of its more diversified competitors.
www.barchart.com
Shares are currently trading at a forward price-to-earnings ratio of 25.8, which is far below the 42.7% five-year forward P/E mean for the company. That means when Wood bought Netflix, she got it at a reasonably good price—assuming that the stock price begins to rebound in the coming weeks.
Netflix had a lot of news in its earnings report. Revenue of $12.25 billion, up 16.2% from a year ago, with net income of $5.28 billion. Analysts were expecting earnings of 0.76 per share, and the final number came in at $1.23, but that was only because it received a $2.8 billion termination fee after its failed attempt to purchase Warner Bros. Discovery’s streaming and film assets.
The company also announced that co-founder Reed Hastings, who stepped down as CEO in 2023, would exit his position as chairman of the board of directors in June when his term expires.
Netflix said it expects to have $3 billion in advertising revenue this year, which would double its 2025 performance, and has been focusing on its cheaper, ad-supported subscription tier as a way to grow revenue.
The company is projecting a slowing of revenue growth in the second quarter, down to 13.5%, but emphasized that it was maintaining its full-year revenue guidance in the range of $50.7 billion and $51.7 billion
“The entertainment business remains extraordinarily dynamic and competitive,” management said in a statement. “We’re in a strong position and are working hard to build on our advantages. Over the years, we’ve learned that the best thing we can do is to stay focused and improve faster than the competition.”
The consensus rating for NFLX stock from 49 analysts is a “Strong Buy,” but, interestingly, the resolve has hardened over the last few weeks. Just three months ago, 27 of 43 analysts had “Buy” ratings, but 14 suggested holding and two urged investors to sell. But now 37 of 49 analysts have “Buy” ratings while nobody suggests selling, and 12 are holding fast.
Analysts have a mean price target of $115.37 for NFLX stock, representing potential upside of 26%.
The bottom line: Wood appears to be on the right track in buying Netflix low. The company is fast-growing; advertising revenue helps fuel its top line, and investors should be comforted in knowing that even though revenue growth is expected to fall this quarter, the full-year outlook remains untouched.
www.barchart.com
On the date of publication, Patrick Sanders did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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