Forget AI Stocks: This Tech Play Is the Real Winner

Many investors have likely found their portfolios becoming dominated by artificial intelligence (AI) stocks. While this makes sense given the sector's incredible growth, it's worth considering if these stocks may be overvalued and more prone to decline in a market downturn. Investors should examine the valuation metrics for AI stocks such as price-to-earnings (P/E), price-to-book (P/B), free cash flow, P/E-to-growth (PEG), and price-to-sales (P/S) to determine if they are exceeding normal historical ranges.

One company that has been overlooked in favor of AI giants is Netflix (NASDAQ: NFLX). This streaming leader has taken a hit this year, with its stock down 17% YTD and 35% over the past 12 months, bringing its valuation to a multiyear low. Netflix trades at just 24 times earnings and 20 times forward earnings, compared to its previous P/E of 63 and forward P/E of 53.

The sell-off was partly due to Netflix's failed attempt to acquire Warner Bros. Discovery (WBD), signaling potential slowing organic growth and a need for new avenues. Recent earnings reports show revenue growth slowing, with Q2 revenue rising 13.4% year-over-year, and Q3 expected to see a drop to 11.7%.

Despite these challenges, Netflix remains the streaming leader, with resources to adapt to changing market conditions. It is focusing on increasing live content, boosting its ad tier service, and acquiring companies like Radford to enhance content creation. Additionally, Netflix is reportedly exploring the addition of live channels, which could boost subscribers and advertising revenue.

This lull in growth provides an opportunity for investors, as the stock is currently at a discounted price. The last time Netflix was this cheap was in 2022, when the P/E ratio fell to 15, leading to a significant price increase over the next three years.

Analysts are generally positive on Netflix, with 69% rating it a buy and a median price target of $93.50, suggesting a 21% upside from its current $77 per-share price. While some investors may be hesitant to add Netflix to a portfolio dominated by AI stocks, its low valuation and strong growth potential could make it a wise long-term investment.