Foreign media reports that after the recent pullback, Netflix's valuation is significantly lower than its previous highs, but the company's fundamentals have not weakened accordingly. CNBC quoted options trader Mike Khouw as saying that Netflix's current forward P/E ratio is about 18.9 times, which is close to the low range of the 2022 bear market, while the quality of its business has improved since then.
Valuation returns to near low levels
The article argues that Netflix's core changes lie in "cheaper stock and stronger business." Compared to the worst market sentiment in 2022, while Netflix's valuation is still slightly high, its profit margins and cash generation capabilities have improved.
Khouw noted that Netflix management has placed greater emphasis on capital discipline in recent years, continuing to repurchase shares rather than acquiring traditional film and television assets at high prices. This practice is seen as helping to improve shareholder returns and drawing more market attention to the company's profitability.
Advertising and AI are seen as profit drivers
The article also mentions that advertising is a key growth driver for Netflix in the coming years. According to the article's projections, Netflix's advertising revenue this year is approximately $3 billion, with a long-term potential to reach $10 billion by around 2030.
On the cost side, generative AI is seen as a positive factor. The report suggests that such tools can be used to reduce production, dubbing, and localization costs. For streaming platforms with high content amortization expenses, this means there is room for improvement in profit margins.
Furthermore, live sports, variety show content, and personalized recommendations are also seen as means to increase user engagement time and maintain pricing power. The article argues that these factors collectively support a positive assessment of Netflix's fundamentals.
Traders provide options trading strategies
Khouw did not directly advocate buying the underlying stock, but instead believed that it was more appropriate to position himself by selling volatility. His proposed solution was a combination of options expiring in August, with the core idea being to obtain premium income while limiting risk.
- Netflix's stock price is around $70.
- Approximately 25 calendar days until the August expiry date.
- Net royalty income was approximately US$1.10.
According to their calculations, the profit range for this combination is approximately between $63.90 and $79.10, while the upside risk is partially hedged by call options with higher strike prices.
The article argues that if the stock price falls further and triggers buying support, the actual cost of holding the stock will fall into a lower valuation range, which is an important basis for its optimistic view.
