Will Netflix Stock Return To Pre-Inflation Shock Highs Of Over $650?

Netflix stock (NASDAQ:NFLX) currently trades at $397 per share, about 43% below its pre-inflation shock high of about $692 seen on November 17, 2021. The stock could have considerable potential for gains if it recovers to these levels. Netflix stock was trading at a low of about $167 in mid-June 2022, just before the Fed started increasing rates. The stock has gained about 137% from these levels. In comparison, the S&P 500 gained about 19% during this period. In recent quarters, Netflix has benefited from optimizing surrounding its new ad-supported plan and its move to cut down on password sharing in North America and many international markets, while offering a new paid sharing option. The company also added a relatively solid 5.9 million subscribers in Q2 thanks to password-sharing changes. 

Interestingly, NFLX stock has had a Sharpe Ratio of 0.6 since early 2017, in line with the 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level means that Netflix stock will have to gain about 74% if the stock recovers from $397 currently to its pre-shock highs of $692. While it’s possible that the stock may recover to those levels, we presently estimate Netflix valuation to be around $377 per share, about 5% below the current market price. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. Netflix’s business may see an adverse impact if the U.S. economy were to go into recession, with consumer spending cooling.

Our detailed analysis of Netflix upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how NFLX stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Netflix and S&P 500 Performance During 2007-08 Crisis

NFLX stock rose from nearly $3 in October 2007 to $5.20 in March 2009 (as the markets bottomed out), implying that the stock gained about 70%, defying the market sell-off. It rose further to around $7.90 in early 2010, rising roughly 52% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach 1,124.

Netflix Fundamentals Over Recent Years

Netflix revenues have risen from around $15.8 billion in 2018 to about $31.60 billion in 2022, as the company’s subscriber base and average revenues per subscriber expanded, driven by the company’s sizable investment into content and its international expansion. Net income has also picked up, rising to about $4.5 billion in 2022 from about $1.2 billion in 2018, as net margins picked up with cost absorption improving with the company’s higher subscriber base. 

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment,  Netflix (NFLX) stock has the potential for gains once fears of a potential recession are allayed.

[1] Month-to-date and year-to-date as of 9/16/2023
[2] Cumulative total returns since the end of 2016

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