NFLX: Possibly The Most Undervalued Stock in the Market

10 de jul. de 2022

In this post, I'll be breaking down Netflix (NFLX) from both a technical and fundamental perspective, exploring a narrative as to why this may be the most undervalued company in the market at the moment.

Netflix has taken a massive hit, trading below $190, when its 52 week high is $700. I covered this stock when it was trading around $600 ranges, and said it wasn’t an appealing buy at those levels. Now that it’s trading at $180 regions, I think this is an amazing buy, and in fact, this could turn out to be a once-in-a-lifetime opportunity in the mid-long term.

This post is not financial advice. This is for educational and entertainment purposes only.

Fundamental Analysis
- This massive drop was caused by Netflix’s first loss in number of net users in a decade.
- Netflix announced that it had lost about 200,000 users.
- People interpreted this to be a sign of weakness in the company’s fundamentals, and this led to a sharp 30% drop in the stock’s price.
- What people didn’t realize at the time, was that Netflix had lost 700,000 users in Russia alone, as it halted business operations in that region due to Russia’s invasion of Ukraine.
- So taking that into consideration, Netflix actually gained 500,000 new users. But that’s not all.
- Netflix announced that it expects the number of users to drop in 2Q22 as well, which drove stock prices further down.
- Why exactly is this the case? Netflix increased their subscription fees over 10% in 1Q22 alone.
- With the effect of that price increase, it’s anticipated that they’ll lose 1% of their entire users.
- Frankly, a 10% increase in price, for a 1% loss in quantity (since revenue is simply p*q) is not a bad outcome at all.
- In fact, it’s a successful move on Netflix’s side. Yet, market sentiment says otherwise, dropping over 72% from all-time highs.
- Nonetheless, this isn’t the first time that Netflix raised their subscription fees.

So why has this price increase in particular led to user loss?
- Netflix has three pricing plans – basic, standard, and premium.
- Netflix has always been aggressive with their increase in prices for premium and standard plans, but not with the basic plan.
- When the price of premium plans increase, users are incentivized to simply change their plan to a standard plan, if they are not willing to pay for the changed price plan, which is why there wasn’t a loss in number of users; people could simply downgrade their plans.
- But when Netflix raises their basic plan subscription fees, there’s no other option than to leave the platform.
- So in 2019, when Netflix raised their basic plan subscription fees, it led to a loss in number of users.
- And this is the first time since 2019 that Netflix raised prices of basic plans.
- Since Netflix has penetrated the market much more than it did in 2019, of course their price strategy led to a bigger impact on the number of users.
- Netflix is working on developing a new plan below the basic plan, known as the advertisement plan.
- This way, it’ll allow them to prevent users from escaping the platform entirely, provide more leeway in increasing their basic plan prices, and offset costs through advertisement revenue generated in the advertisement plan.
- If you’re in in for the long run, like me, you need to be in accordance with the overall concept and trend that less and less people will watch television networks, and more and more people will watch content on streaming platforms.
- Netflix is the biggest platform in the entire world, where people pay the most money to watch their streaming content.
- Their plans are the most expensive, and they have the highest number of users out of all platforms.
- With the revenue generated, Netflix is aggressively reinvesting capital back into creating high-quality original content.
- Considering the Hollywood success function that the more capital invested, the higher the probability that the content is going to turn out to be sensational, there’s a high probability that Netflix’s original content will be more entertaining than that of other platforms.
- It’s also the only platform that can add dubs and subs to their content immediately and distribute their content on a global scale at once.
- And this isn’t based on my imagination. It’s based on Netflix’s track record and their success cases with global content.
- Given that all else is equal, this means that Netflix has a competitive edge in content quality compared to its counterparts.
- However, all else is not equal. Netflix is dominant in most aspects of the OTT market compared to its counterparts.
- Out of the top 10 google search results for TV shows, 6 were Netflix content, and 2 out of 10 for movies.
- Moreover, Netflix owns most of the intellectual property (IP) related to the content produced.
- The scalability that IPs produce can give Netflix a massive competitive edge, but Netflix chooses not to use this weapon in their arsenal yet.

Technical Analysis
- What we have here is the monthly logarithmic chart for Netflix
- While the price has dropped steeply in a short period of time, it's also worth noting that the moving averages are aligned in order still, with the 200 simple moving average to be potentially tested as support
- We can see a pattern in which the stock's price consolidates in a region before breaking out, and the resistance of the consolidation region, which later becomes support, is retested before a continued rally upwards, as shown from the price action between 2003 and 2013.
- We are seeing something similar here, as previous resistance levels, now support, are being tested as depicted by the red zone.
- What's most worth noting is that the relative strength index (RSI) has never been at this level historically; from a technical perspective, Netflix has never been this oversold.

Conclusion
To me, Netflix is like Bill Gates wearing a Casio watch. He can definitely afford to wear a Patek Philippe, but chooses to wear a Casio, considering the TPO. The difference is: people understand that Gates is wealthy, regardless of what watch he wears, but fails to understand that Netflix, just like Gates, chooses not to do many things that could help them generate massive cash flow. Netflix does not have direct advertisements on their platform yet, and hasn’t expanded to the gaming industry with their IP. Remember how everyone was playing Squid Games on Roblox a few months ago? Netflix owns the IP to that series, and could have easily monetized it. They simply chose not to expand in that direction yet. This is a company that not only is dominant in its market, but demonstrates massive potential in both vertical and horizontal business expansion. I truly believe this company is undervalued for what it’s worth, and could even say that this is possibly the most undervalued stock in the market.

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