This Could Be the Real Reason Netflix Stock Continues to Struggle

Key Points

• Netflix’s stock has been volatile this year amid rumors of acquisitions and news that Reed Hastings would be leaving the company.

• The company recently dismissed rumors of a possible acquisition of Lionsgate Studios.

• The stock’s valuation has become more modest, and it’s now in line with the S&P 500 average.

• 10 stocks we like better than Netflix ›

Netflix (NASDAQ: NFLX) has been a top growth stock for years, but recently, it’s been struggling to get out of what may seem like an endless tailspin. In just the past 12 months, the streaming stock has lost more than 40% of its value. It’s a sharp decline for a business that’s been growing well and still has plenty of opportunities ahead.

Here’s a look at what may be the real reason behind Netflix’s declining valuation, and whether the stock could be a good buy right now.

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Are investors worried about an acquisition disrupting the business?

Earlier this year, Netflix’s stock was rallying after it announced it would no longer pursue its plan to buy key assets from Warner Bros. Discovery, as a bidding war with Paramount Skydance proved too expensive. Paramount is now in the midst of acquiring all of Warner Bros. Discovery in a deal that should be completed later this year.

But investors may be concerned that Netflix will pursue another acquisition. There have been rumors that the company has been interested in acquiring Lionsgate Studios, but Netflix has denied that it is the case.

This may explain why there’s still been some bearishness around Netflix’s stock, despite it abandoning the Warner Bros. deal; investors may be concerned that the business is on the hunt for an acquisition to strengthen its growth prospects. Acquisitions can be costly and are by no means a sure thing to pay off. However, even with Netflix denying the recent Lionsgate rumors, investors may be unconvinced, as the stock continues to fall.

The stock also crashed in April after news came out that its co-founder Reed Hastings would be stepping down as chairman. While Hastings is no longer the CEO of the company, it underscores the uncertainty ahead for the business. Investors may see the stock as a far riskier option these days.

Could Netflix’s stock be a bargain buy right now?

Although investors have been dumping Netflix’s stock of late, that doesn’t mean the business is in bad shape. It’s consistently profitable, and it continues to generate solid double-digit growth. The streaming stock now trades at a price-to-earnings (P/E) multiple of 24, which is in line with the S&P 500 average.

This is a blue chip stock that’s effectively been on sale for a while now. While there is some uncertainty about the business moving forward, the company has excellent fundamentals and could be a terrific buy on weakness right now.

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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.