Netflix is a buy at these levels, this portfolio manager says

It’s been a great second act from streaming king Netflix (Netflix Stock Quote, Charts, News, Analysts, Financials NASDAQ:NFLX), which has rallied for a gain of 78 per cent so far over the third and fourth quarters. And there should be more where that came from, according to portfolio manager David Baskin of Baskin Wealth Management, who thinks including an ad-supported version on its platform will continue to drive growth for the company.

Netflix was an early pandemic success story, as the market liked the idea of more people bingewatching their favourite shows during lockdowns and the stay-at-home economy. That drove the share price to a return of about 87 per cent between early 2020 and late 2021. 

But the fall from grace has been even more eye-opening, as NFLX went from about $690 per share to as low as $170 by June of this year. Since then, though, the stock has popped back above $300.

Some of that drop can be attributed to the general market pullback on tech and growth stocks which began last November, but the damage was also self-inflicted to an extent, as Netflix posted declines in subscriptions earlier this year, spooking investors who were seeing the streaming wars taking their toll on the market leader. A price hike early in the year likely didn’t help things either, where in Canada a standard Netflix subscription rose by $1.50 to $16.49 and the premium package went up $2 to $20.99.

For Baskin, the subscriber hit the company took as a result of raising monthly fees was a bit of a surprise.

“I underestimated how much people would react to a price increase. I thought the demand for Netflix was pretty inelastic, in other words, that people would say, ‘Two bucks. I don’t care. I want my Netflix,’” Baskin said, speaking on BNN Bloomberg on Thursday.

“They’re in a very competitive environment now with Disney and Prime and Apple, and it turned out that people didn’t like that price increase and they lost some subscribers,” he said.

But with a lower-priced ad-supported option having arrived in November, investors are looking more positive on Netflix, as is management, who said in their latest quarterly comments that they’re “very optimistic” about the extra revenue in upcoming quarters from ads as well as paid membership sharing, which aims at cutting down password sharing.

Baskin said Netflix’s future looks brighter from here.

“But Netflix has pivoted and now offers a ad-driven service at a lower price. And they’re very enthusiastic about it, to the extent that the CEO of Netflix basically said, ‘Why didn’t we do this years ago?’” he said.

“We’ve seen the stock bounce off the bottom. It has almost doubled from its worst. And I think today at this price, it’s a pretty good buy,” he said. “[And a 12-month return] of minus 16 per cent in the past year isn’t such a disaster.”