Netflix stock has crashed ahead of earnings: a bargain or value trap?

Netflix stock has been in a sharp downtrend over the past 12 months, erasing billions of dollars in market capitalization. It dropped to $73 last week, about 45% below its all-time high. Although the decline has made the stock look attractively valued, there are increasing signs that it could be becoming a value trap as investors await its quarterly earnings report.

Netflix stock has become a bargain amid the crash

Several valuation metrics suggest that the NFLX stock has become a bargain this year.

For example, TradingView data shows that the price-to-earnings ratio has dropped to 23.7, its lowest level in over four years. It has been in a strong downtrend after hitting last year’s high of 62.

More data shows that the forward PE ratio has dropped to 20, much lower than the five-year average of 36. The forward price-to-earnings-to-growth (PEG) ratio slumped to 0.98, much lower than the five-year average of 1.40. 

These numbers mean that the company is significantly cheaper than the broader market. For example, the S&P 500 Index has a forward PE ratio of 22. 

A bargain or a value trap?

Historically, popular investors have always recommended that investors should buy cheap and sell high. At face value, Netflix seems like a good company to buy based on these valuation metrics.

READ MORE: Netflix needs a new growth story to halt its stock decline

Besides, it is one of the most popular media companies in the world with millions of users. Historically, its business has had low churn, giving it a big market share in the streaming industry by far.

However, a closer look shows that the company is morphing into a value trap as its growth is not what it was before. This likely explains why the management was comfortable with placing a highly expensive cash-rich offer to Warner Bros. Discovery.

Netflix publishes its earnings report this week. Yahoo Finance data shows that the consensus view is that its revenue jumped by 13% in the last quarter to $12.58 billion. This growth is expected to slow to 12.9% YoY in the third quarter to $12.8 billion. 

Analysts predict that Netflix’s annual revenue will grow by 13% this year and 11% next year. Barring any major development, growth will move to the single digits in 2028. 

These developments also explain why the company is considering all options to boost its growth. The WSJ reported that Netflix was considering moving into the live TV space. In its report, the paper noted that the management team had observed that customers were no longer highly engaged in its shows recently.

On the positive side, the stock's sharp decline and lower valuation may encourage management to expand its share repurchase program. The company is already executing a $6 billion buyback and could announce an increase this week to help support the share price. 

However, history shows that buybacks alone are often insufficient to drive a sustained recovery. PayPal is a good example, as its shares have remained under pressure despite billions of dollars spent on repurchases.

Netflix stock price technicals point to more declines

NFLX stock chart | Source: TradingView

The weekly chart suggests that the Netflix stock price crash has more room to go. It has already plunged below the crucial support level of $73.37, invalidating the double-bottom pattern.

It has also plunged below the 50% Fibonacci Retracement level and moved below the 50-week moving average. Therefore, the path of the least resistance is downwards, with the next key target to watch being at $61.15, the 61.8% Fibonacci Retracement level.