The FAANG stocks are a set of five high-value technology stocks. Together they make up nearly a fifth of the S&P 500’s total value. The “N” in FAANG stands for Netflix. One of the first major tech companies, Netflix arguably invented and defined the streaming era. This has made it a highly successful company and, in the process, a highly desirable stock. Here’s what you need to know about investing in it. But diving into the tech sector can be tricky, which is why it’s wise to work with a financial advisor to ensure your choices fit your goals, risk profile and time line.
To Buy or Not to Buy Netflix Stock
Netflix is one of the most expensive stocks in the world. At time of writing shares were trading for more than $500, and the PE ratio was north of 60. Netflix is also one of the most high-growth assets on the stock market, having nearly quintupled in value over the past five years alone. In 2016, this stock traded for just below $100 per share. Keep in mind that there is less room for profitable growth in a high-value stock. If a $10 stock gains $5 in value, investors enjoy returns of 50%. If Netflix gains $5, investors see a 1% return.
This isn’t to say that Netflix is a bad investment either. This company in very large part invented the streaming model that has come to define modern entertainment. For all intents and purposes, the Netflix experience is the way in which we now watch television. It created some of the most popular prestige titles on streaming and continues to produce new hit shows on a regular basis.
Investors have flocked to this stock for a reason. Just don’t take that to mean that you will necessarily make money off of it. If you had invested in Netflix back in 2002, you would have made a fortune. If you invest in 2021, that’s a bigger question.
Questions to Ask
If you are interested in purchasing Netflix stock, you can review a few basic questions. First, how does the company’s recent earnings report look? How does that line up with the performance of their stock? That’s not to say you’re necessarily looking for growth. A weak quarterly report might suggest that their stock will soon dip, creating an opportunity for you to buy in cheap.
You can review the performance of Netflix’s peer tech companies. How is this sector doing as a whole? How are other streaming platforms doing? You might also review the entertainment landscape. What kind of competition is Netflix facing? Do you think, for example, that the emergence of competitors like Disney+ and Peacock will take business from Netflix? Or do they indicate growth in the streaming sector overall?
Finally, review how a Netflix investment fits into your overall investment strategy.
Tech stocks in particular tend to be relatively volatile investments. They are some of the most valuable, most high-growth assets on the market today (in fact they dominate the value of the S&P 500, as noted above). They can also fluctuate wildly. This compounds the fact that investing in any individual equity is a relatively risky move compared with more stable assets such as mutual funds and ETFs. Given these risks, and the corresponding potential for reward, you should ask yourself how a Netflix investment fits into your portfolio as a whole.
Here it is worth taking a moment to be careful. With a stock like Netflix, investors often jump in with both feet. Take your time and remember that just because a stock is worth a lot doesn’t mean that it will be worth a lot to you. The people who profit off Netflix’s high-priced shares are the ones who far less than $500 for each share.
For you, the only question is how much will it go up tomorrow? If you buy it for $500, how much more can you sell it for? Remember: Investment is a game of percentages. If Netflix doesn’t grow by a healthy percent, your investment portfolio won’t either.
How To Buy Netflix Stock
From a mechanical standpoint, buying Netflix stock is the same as buying any other mainstream equity. Netflix is traded on the NASDAQ Stock Exchange. To buy it, you will need an account with a brokerage. You can do this either through a stock broker who takes orders in person, such as a local office or a major company like Charles Schwab. Or you can open an account with an online trading platform like E*TRADE or TD Ameritrade.
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Once you create your account, you can give an order to buy Netflix stock directly. You can make this transaction in real time, so long as the stock market is open, since this is a mainstream, listed equity.
The Bottom Line
Netflix is one of the highest-priced stocks on the market today. It can be a great investment for the right buyer, but be careful not to jump in just because the numbers are big. First, size up the tech sector in general. Then do your analysis of Netflix earnings and rivals. Are there more attractive options in the same sector, like Disney+, HBO Max, Peacock, Paramount+, AppleTV+, Amazon Prime Video or Hulu? Finally, make sure you have an exit strategy: How high would shares have to go for you to initiate a sell order?
Tips on Investing
- Buying any individual stock can be a risky decision. We can help. With SmartAsset’s matching tool you can find a financial advisor near you to help you weigh risks, allocate assets and decide how to best balance your portfolio. If you’re ready, get started now.
- One of the best tools for any investor is a free, easy-to-use investment calculator. Just plug in starting balance, additional contributions, estimated rate of return and years go grow.
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