Shares of Netflix (NFLX) have underperformed the market significantly in 2022, falling 35% and 46% in the respective three and six months. The stock has also plunged 38% and 37% over the past nine months and 12 months, respectively. Is now a buying opportunity?
The streaming pioneer is set to report first quarter fiscal 2022 earnings results after the closing bell Tuesday. While the term pioneer is still applicable, Netflix is not alone anymore. The likes of Disney’s (DIS) which also owns Hulu, is catching up. This has prompted some market participants to wonder whether the company can maintain its status as the king of streaming. Is the recent decline the start of a new trend or a buying opportunity?
Not according to Benjamin Swinburne, analyst at Morgan Stanley. Citing declining estimates for net subscriber additions, Swinburne trimmed estimates and his price target on Netflix to $425 per share down from $450. Although he kept is Equal Weight rating, the analyst cut is Q1 estimate for global paid net new subscribers down from 2.5 million to 2 million. While the market broadly expects Netflix to remain a successful streamer in 2022, Swinburne doesn’t expect Netflix to grow new subscribers at its pre-pandemic rate of about 25 million per year.
Nevertheless, with more than 222 million global paid subscribers, Netflix is by far the industry leader, ahead of the aforementioned Disney, and recent streamers such as HBO Max (T) and Apple TV+ (AAPL). However, the company has seen its market share decline from 51.4% in Q1 2020 to 43.6% in Q4 2021. This has prompted investors to wonder whether Netflix can maintain its status as the king of streaming. The company can answer these questions on Tuesday by beating on the top and bottom lines and guiding confidently.
For the quarter that ended March, Wall Street expects Netflix to earn $2.90 per share on revenue of $7.93 billion. This compares to the year-ago quarter when earnings were $3.75 per share on $7.16 billion in revenue. For the full year, ending in December, Netflix’s earnings are projected to decline 2.3% year-over-year to $10.98 per share, while full-year revenue of $33.37 billion would mark an increase of 12.4% year-over-year.
The streaming market size is forecasted to grow by better than 18% annually (compound) in the next four years. With a total addressable streaming market of 750 million, Netflix’s 222 million subs means it has only penetrated 30% of the market. In other words, the company still has 70% of the market to capture. When combined with the lowest churn in the industry, Netflix has a notable advantage. The company’s original content such as Squid Game and La Casa De Papel has been a key to its subscriber growth.
But Netflix needs to revive the growth metrics. In Q4, subscriber adds missed both Street expectations and company guidance, coming in at 8.28 million worldwide, below its own expectations for 8.5 million and Street estimates for 8.32 million. Q4 revenues grew in-line 16% year-over-year to $7.71 billion, while operating income fell 34% to end up at $631.8 million, but above estimates of $559 million. Also worrisome was that Q4 free cash flow turned negative to $569 million.
Investors were understandably disappointed by these results, which explains the degree of punishment the stock has seen year to date. Netflix management has shown it can pivot to make the necessary adjustments to remain competitive. But on Tuesday the market wants to see if Netflix can reaccelerate its revenue growth rate back up above 20%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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