Opportunity: This Stock is Cheap and Positioned to Grow

If you are like many investors, your portfolio has probably become top heavy with artificial intelligence (AI) stocks. And, honestly, it is very easy to see why, considering how incredibly fertile the AI sector has been.

But after four years of meteoric gains, some AI stocks might be overvalued and more prone to fall should the market head south. Check the valuation metrics for some of your AI stocks, like price-to-earnings (P/E), price-to-book (P/B), free cash flow, P/E-to-growth (PEG), and price-to-sales (P/S), among others, to see if they are elevated beyond normal historical ranges. If they are, you should do some additional research to see if they are vulnerable.

If your portfolio is AI heavy, it’s best to look for other opportunities to provide balance. This might include defensive stocks, value plays, dividend stocks, and bonds. You can also add some alpha with some reasonably valued growth stocks outside of the AI universe.

One excellent non-AI tech stock to consider is Netflix (NFLX).

Netflix and grow
It is an opportune time to consider Netflix stock, as the streaming leader trades at a considerable discount.

Netflix stock has taken its lumps this year, down 17% year to date (YTD) and 35% during the past 12 months. The sell-off has brought Netflix’s valuation down to a multiyear low. It is trading at just 24 times earnings and 20 times forward earnings. Just over a year ago, it had a P/E of 63 and a forward P/E of 53.

Netflix’s decline this year stems from a few different factors. Most notably, perhaps, is its thwarted attempt to buy Warner Bros. Discovery (WBD) earlier this year. While many argue that losing out to Paramount Skydance (PSKY) may ultimately be a good thing given the cost and integration challenges, the stock price took a hit. That’s because it signaled something broader, perhaps — that Netflix’s rapid organic growth over the years may be slowing and that it needs new growth avenues.

That slowing growth has been borne out in recent earnings reports, as revenue rose 13.4% year over year in the second quarter, down from 16.2% in Q1. In Q3, revenue growth is projected to drop to 11.7%. This is not unusual for a maturing company, particularly for one that has largely saturated its major markets.

The fact remains that Netflix is far and away the streaming leader, with the platform and resources to adapt and evolve with a changing marketplace. It is currently focusing on increasing its live content to drive more new subscriptions and boosting its ad tier service to increase advertising revenue.

It is also looking to make acquisitions, as it was recently reported that it plans to purchase a small Los Angeles studio, Radford, to help with its content creation. There was also a July report in The Wall Street Journal that Netflix was looking to add live channels, which would help boost both subscribers and ad revenue.

Good, cheap stock
So, during this lull, when Netflix figures out its next phase of growth, the stock is available at a cheap price.

The last time Netflix stock was this cheap was in 2022 during the last bear market, when the P/E ratio fell to 15 in June of that year. Then the stock price plummeted to $16 per share, but during the next three years it shot up to $131. It is impossible to know whether it will see similar gains, but given its relatively low valuation now, it is well positioned to grow.

Wall Street mostly agrees as 69% of analysts rate Netflix stock a buy with a median price target of $93.50. That would suggest 21% upside from its current $77 per-share price.

Netflix might be a good stock to add in place of some of those AI stocks that may have become overvalued.

— Dave Kovaleski

Source: The Motley Fool