Anyone long tech stocks has felt the pain since November. Look at the chart of NLFX below, over $650 to $227 ? Wow.
So, after the second gap-down, is NFLX a buy now? The chart certainly says "No". What do NFLX's fundamentals tell us? Current year earnings estimates of $11 seem reasonable for a high-quality company, but a closer look shows that there are earnings, but not really cash flows:
Free Cash flow was not there prior to this weeks earnings disaster, so the warning signs were there. The balance sheet is not good either - they have been funding "growth" with debt. Peak cash from operations rounds up to $2.5 billion, which leaves the debt at an unhealthy and risky 6X cash from operations. Its quite unclear where NFLX becomes a safe buy, but lets say that Free Cash flow is $4 billion, even though nothing in the financials suggests this is reality and lets say that its safe to pay 15X free cash flow ( which might be high), provides us a $135 safe zone to buy NFLX - so, probably another $100 to fall - stay away. NFLX is the Dagger - don't try and catch it. Lets look at Paypal (PYPL), the falling knife. Since November, it is also a disaster, but its looking like there might be support on the chart around $95.
The fundamentals for PYPL tell a pretty good story. Current year earnings estimates are a healthy $4.62, rising to a very healthy 2024 consensus of $7.
Paypal's Net Income flattened out last year, giving investors plenty of warning to get out late last year. At this $95 price level, you get a solid growth story (2021's flat net income is overshadowed by strong revenue growth, which they don't have to "buy" like NFLX). Free Cash Flow is consistently higher than Net Income. Using the same 15X free-cash flow target (assuming free cash flow doesn't grow from the current $5.5 billion run-rate), you can see that PYPL has downside to $69. That said, at 20X trailing free cash flow, PYPL is fairly priced in the mid-90s. Consensus revenue for 2023 is $35 billion and for 2024 revenue is projected to be north of $40 billion. With a good chance of $40 billion in revenue at 20% free cash margins, trading at 15X, PYPL is worth $101, which is not too exciting considering the stock price of $96.
Contrasting NFLX vs. PYPL you can see NFLX is mostly negative cash flow, with an increasing share count, high debt and likely to trade down over $90 versus PYPL that throws off great cash, always lowering the share count, with a strong balance sheet. If you have to pick one to bottom fish, then go for PYPL.
