You may want to consider buying this not-so-obvious AI stock on its recent 20% pullback.
There is so much hype surrounding artificial intelligence (AI) right now that some wonder whether the market has entered bubble territory, akin to the internet’s early years in the late 1990s. The dot-com bubble ended with a vicious bear market, and some of the most-hyped stocks took years to recover, if at all.
History may rhyme, but it’s never a word-for-word, bar-for-bar duplicate of the past. Some AI stocks trade at uncomfortably lofty valuations, but others remain strong buys, even today.
Streaming giant Netflix (NFLX +1.43%) is experiencing a slump, having declined nearly 20% from its high. The stock’s struggles continued following the company’s latest earnings report.
Here is why this not-so-obvious AI stock is actually one that you may want to buy hand over fist.
Image source: Netflix.
Not your typical AI stock, but an AI stock nonetheless
Mention artificial intelligence, and the first things to come to mind are probably Nvidia and other chip and data center stocks. A streaming company like Netflix isn’t near the top of any AI list. Yet it’s very much an AI stock.
As the attention on AI moves from infrastructure to real-world applications (goods and services that people actually pay money for) to justify spending billions of dollars on all these AI data centers, the game starts to change. Data will become increasingly crucial to the equation. Businesses that apply the best data to their AI will likely see the best outcomes.
Proprietary data is the pillar of Netflix’s streaming platform. It accumulates it as hundreds of millions of users spend hours consuming content across the platform. The company then uses this data to inform its content strategy, anticipate trends, and ensure that it recommends the most suitable shows and movies to each user.
The aim is to make for a better streaming experience, which in turn gives Netflix more ability to raise its prices and attract more subscribers to the platform. This isn’t a direct AI play, but AI will ultimately make the company a better business.
The huge potential ahead
When Netflix discusses its competition, it often refers not only to other streaming services but also to social media platforms, video games, and any other activity that someone might spend time doing besides watching Netflix.
In a way, the company views itself as more than just a streaming platform, and investors should, too. That is reflected in management’s decision to launch mobile games, and it shows just how much potential the company has over the coming years.
Today’s Change
(1.43%) $1.54
Current Price
$109.12
Key Data Points
Market Cap
$456B
Day’s Range
$106.31 – $109.33
52wk Range
$82.11 – $134.12
Volume
834K
Avg Vol
37M
Gross Margin
48.02%
Dividend Yield
N/A
Streaming itself is still experiencing an ongoing growth trend. The company had just over 301 million paid subscribers at the end of last year, when Netflix last reported its subscriber count. And its international footprint means that there are billions of potential customers still out there.
Also, Netflix is expanding its live sports offerings, featuring National Football League games and other events. Live sports are one of the last remaining reasons that people still use cable television.
The company’s revenue grew 17% year over year in the third quarter, and it has several levers it can pull to continue growing at a double-digit pace for the foreseeable future. Those include:
- Subscriber growth.
- Price increases.
- Advertising revenue.
- New content categories (like gaming and live broadcasting).
Network effects will continue to enhance the business, especially as AI improves. The company can invest its increasing cash flow into growing the business, and the cycle will repeat itself.
The stock’s compelling price tag
It’s all a very convincing narrative, yet the stock has lost momentum since reporting its third-quarter earnings. Why? Netflix had an ugly headline earnings number due to an expected $619 million charge related to a tax dispute with Brazil.
Bad news is inevitable for any stock. When it happens, investors need to separate bad news into two piles: big deals and small deals.
Notably, Netflix management noted that this was a one-time charge, meaning that it has resolved the dispute and it won’t appear in future earnings results. Since the charge didn’t involve anything related to the core business, it certainly seems that this is a minor issue and not worth too much worry.
In the meantime, the stock has a compelling price tag following its 20% slide. Shares trade at roughly 42 times full-year earnings estimates.
That may seem high, but if you zoom out, you’ll see a business that has consistently increased its net profit margins as revenue has grown over the years. Combine higher profit margins with double-digit revenue growth, and Wall Street analysts estimate that Netflix will grow its earnings per share at a compound annual rate of 24.5% over the long term.
Suddenly, that high price-to-earnings ratio seems far more reasonable. If the company delivers as expected, the stock is likely to perform well for investors over the coming years, just as Netflix has for its existing long-term shareholders.
