Netflix’s share price may not reflect the company’s improving business fundamentals, according to options trader Mike Khouw, who believes the streaming leader is trading at an attractive valuation despite posting stronger financial performance than it did just a few years ago.
Speaking on CNBC’s Options Action, Khouw argued that Netflix’s current valuation presents an opportunity for investors, noting that the stock has become cheaper even as the company’s revenue model and profitability continue to improve.
Advertising and AI strengthen Netflix’s long-term outlook
Khouw pointed out that Netflix currently trades at approximately 18.9 times forward earnings, only modestly above the company’s 2022 valuation lows. He explained that while Netflix stopped emphasizing subscriber growth in favor of revenue, operating margins, and free cash flow, many investors shifted their attention elsewhere despite the business becoming stronger.
He highlighted Netflix’s advertising business as one of its biggest long-term growth drivers. With roughly 325 million paying subscribers, Khouw believes the company’s ad-supported tier could generate around $3 billion in advertising revenue this year, with the potential to approach $10 billion annually by 2030.
The CNBC analyst also noted that Netflix’s disciplined capital allocation and increasing use of generative AI could further improve profitability. According to Khouw, AI has the potential to lower production, dubbing, and localization costs while enhancing content recommendations and user engagement.
Rather than recommending investors buy Netflix shares outright, Khouw suggested a defined-risk covered strangle options strategy ahead of the August expiration. The proposed trade seeks to generate premium income while limiting upside exposure through a protective call option.
He noted that investors assigned below the proposed strike price would effectively acquire Netflix shares at a valuation close to the company’s 2022 lows, a level he considers attractive given the company’s stronger financial position today.
