More Evidence Emerges of Netflix's Slowing Growth

Netflix's (NASDAQ: NFLX) fortunes have quickly reversed. At the pandemic's onset, it thrived as billions of people worldwide looked for in-home entertainment while cooped up indoors. Several entertainment companies entered the streaming industry more aggressively, seeing it as an excellent opportunity.

The combination has been bad news for Netflix. Now, as billions of doses of vaccines have been administered, and folks are leaving their homes more often, demand for in-home entertainment is falling. Meanwhile, Netflix has to split a smaller pie with more participants. To adjust to the bleaker circumstances, the streaming giant announced that it was laying off 150 workers (out of a total of about 12,000) -- or a little over 1%.

A person sitting on a couch and watching television.

Image source: Getty Images.

Netflix is cutting costs as growth slows

For the first time in over a decade, Netflix reported a quarter-over-quarter loss in subscribers. The 200,000 loss may be slight when you consider that it boasts 222 million subs overall, but it could be the start of a trend in the wrong direction. Indeed, management is forecasting a loss of two million subs in the next quarter.

In the conference call that followed the company's earnings release on April 19, CFO Spencer Neumann said:

"We talked about in the letter, during this period of slower revenue growth, we're going to protect our operating margins, roughly in line with what we guided to for this year. So we're holding to our guidance for the full year '22. But for -- presumably, for the next 18, 24 months, call it the next two years, we're kind of operating to roughly that operating margin, which does mean that we're pulling back on some of our spend growth across both content and noncontent spend."

NFLX Operating Margin (TTM) Chart

NFLX Operating Margin (TTM) data by YCharts.

In other words, Netflix will be managing the business to keep its operating margin from falling as revenue growth stalls. It's no surprise, then, that it announced this recent round of layoffs totaling 150 workers. What could be next on the chopping block is Netflix's content budget. In the quarter ended in March, Netflix spent $3.6 billion on content. To put that figure into context, Netflix's revenue was $7.9 billion at that same time.

It could be an excellent time to buy Netflix stock

Netflix is down a whopping 74% off its high. The stock is trading at a price-to-earnings ratio of 16, near the lowest in the last five years. To be sure, the competitive landscape has changed for the worse. But Netflix has had competitors before, including the lowest-price competitor, YouTube, which has tons of ad-supported content free for viewers.

NFLX PE Ratio Chart

NFLX PE Ratio data by YCharts.

Additionally, investors have focused solely on the downside of streaming competition. They have mostly neglected a potential positive outcome from the rise in streaming services. Consumers could be more encouraged than ever to cancel traditional cable subscriptions and switch to streaming. In that scenario, a household could retain multiple streaming subscriptions at a monthly price that is still lower than the cable bundle. That scenario is not priced into the current doom-and-gloom outlook reflected in Netflix's stock price crash.

Nevertheless, subscriber and revenue growth is slowing in the near term. That is the moment's reality that the company has to deal with right now.

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Parkev Tatevosian has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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