Netflix Stock at a Crossroads | Cramer's Verdict

as Thursday. It's gone from a beloved market darling to a complete pariah. >> [groaning] >> Of course, Netflix is not alone here. The entire media cohort has been struggling. But in the old days, Netflix rarely traded just like another media stock. This is the company that invented streaming video. But now everybody in the business has their own subscription streaming platform. Now we got to start asking ourselves if Netflix is still unique, or is the competition for your eyeballs at last catching up to this amazing business. When the company reported last week, the sales missed expectations slightly. And earnings per share matched the consensus estimates. These were not awful numbers. But they certainly weren't what the bulls hoped for. Worse, Netflix's free cash flow was much, much lower than expected, just 1.53 billion. Wall Street was looking for 2.67 billion. Uh that was mostly from higher tax payments, including taxes on the termination fees they got when Warner Brothers walked away from that merger. So this wasn't necessarily a collapse in the underlying cash generating power of the business. But when a stock has already lost the market's confidence, a free cash flow miss more than 1 billion dollars is not what you want to see. The worst part though was the guidance. For the third quarter, Netflix guided for weaker than expected revenue and earnings, while also narrowing their full year forecast. Of course, the company isn't falling apart. It's still on pace for 13 to 14% revenue growth this year, with a 31.5% operating margin, 12.5 billion in free cash flow. Most companies would kill for those numbers. The problem is that the direction of travel is a lot less exciting than it used to be. In the second quarter of last year, Netflix's uh it grew at a 16% clip. The growth here is decelerating. Magnum blamed some of the deceleration on timing and tougher comparisons, but it's harder and harder for the bulls to dream up the for the company to accelerate its core subscription business. Netflix also announced that it will begin releasing its what we watched engagement report annually rather than twice a year. Remember, Netflix stopped giving us quarterly subscriber numbers in the first quarter of 2025. Now it's reducing the frequency of engagement disclosures. Whenever a company decides to give you less transparency, Wall Street tends to assume management's hiding something. Again, not ideal. At the same time, Netflix hasn't been producing the kind of franchises that used to drive dramatic subscriber growth. Where's the next Squid Games or Stranger Things? Maybe they're coming. We're certainly ready for it. Personally, I liked the American Experiment documentary and I will find you series, but those weren't pop culture sensations like Netflix has had in the past. Unfortunately, the streaming business has become increasingly, here's a word you never want to hear, commoditized. Consumers can subscribe to Netflix for 1 month, switch to HBO Max for the next, then move over to Disney Plus and Apple TV Plus and Paramount Plus. The switching cost zero. Apple, Google, and Amazon can afford to treat entertainment as a strategic side business. Apple doesn't need Apple TV Plus to generate Netflix-like margins. Amazon uses Prime Video to make Prime subscription more valuable and more products and and and gain market share. Which brings me to the Warner Brothers deal. Many investors hated the idea of Netflix buying Warner Brothers. The prospect of that acquisition crushed the stock. Bulls didn't want Netflix entering a bidding war with Paramount over an old media business filled with declining cable networks. When the transaction fell apart, Netflix got a $3 billion termination payment. Wall Street actually treated that like it was a victory. But the problem here is that it now looks like Netflix arguably needed Warner Brothers more than even the skeptics thought. This deal would have brought an enormous library of intellectual property including HBO, DC Comics characters, and decades of television programming. Still, the stock's almost been cut in half over the last year. So, let's talk about what makes this stock interesting. When they're cut in half or near it, I get more interested, not less. First of all, Netflix repurchased $4.7 billion of stock during the second quarter. That's the largest quarterly buyback in its history. It still has roughly $27 billion remaining under the repurchase authorization. Netflix is expected to produce $12.5 billion of free cash flow this year. It can fund the slate the slate invested advertising experiment with games and live programming and still retire a normal amount of stock. >> [music] >> If the share price remains depressed, Netflix can keep up the buyback. Don't forget, they've been among the best capital allocators in the industry growing into a global behemoth while maintaining relatively little debt versus when it first started. At 19 times this year's earnings estimates, Netflix is the cheapest it's been since 2022, and you know what happened since then. It turned out to be one of the great buying opportunities that I've seen. From 2025 through 2028, a JPMorgan expects Netflix to produce compound annual growth rate of 12% for currency neutral revenue, 20% for operating income, 24% for earnings per share, 22% for free cash flow. If those numbers are even close to right, sign me up. The stock's trading at a discount to the S&P 500 as a whole. That's crazy. Premium growth expected for the next few years. Then again, many members of the Magnificent Seven trade at similar discounts to the market, and some of them are better businesses. Heck, Nvidia trades at a lower price-to-earnings multiple based on next year's numbers. So, should you buy the dip? Look, I won't pretend that the quarter was great. It was a disappointment. >> [crying] >> The content slate clearly isn't as strong as usual. Meanwhile, Netflix is investing heavily across ads, games, live programming, podcasts, sports, including some potentially big NFL games, and AI. And while it's historically cheap, 19 times its earnings isn't exactly a steal. If engagement keeps slowing and revenue growth falls into the single digits, the stock can certainly still get cheaper. On the other hand, this is not a broken company. It's one of the best companies around with one of the best products, and the numbers are still better than most. I think there's a reason why these guys are buying back stock at the fastest pace in history. Advertising revenue should roughly double to $3 billion this year, and management believes the gap between the economics of the ad-supported and the ad-free plans is narrowing. Netflix estimates there's less than 45% penetration of its addressable broadband households. Captures only about 7% of the entertainment revenue available in these markets, and accounts for just about 5% of global television viewing. So, there's still plenty of room for growth. So, here's the bottom line. Netflix may no longer be a hypergrowth monopoly story. But, at 19 times earnings, hey, I'm thinking you're getting a well-managed business with one of the largest corporate buybacks in America. It's not often you get one of the best companies ever created put on sale. That said, you know what? You can take your time. It's just off from today. You you you you don't have to rush this. If you're still believing Netflix, I put a small position here, and then gradually add on the weakness in pyramid style. Because I wouldn't be surprised if the weakness [music] sticks with us for a while.