Shares of Netflix (NFLX) have underperformed the market significantly over the past three months, falling about 15% compared to an 8% rise in the S&P 500 index. This has prompted some market participants to wonder whether the company can maintain its status as the king of streaming, and if the recent decline the start of a new trend or a buying opportunity.
The streaming pioneer is set to report fourth quarter fiscal 2021 earnings results after the closing bell Thursday. While the term pioneer is still applicable, Netflix is not alone anymore. The likes of Disney (DIS), which also owns Hulu in addition to Disney+, is catching up. Hulu compared favorably to Netflix when assessing the number of percentage streaming hours consumed. While the market broadly expects Netflix to remain a successful streamer in 2022, the company's pricing power is now a legitimate question.
That said, Netflix has tons of cash and will spend almost $14 billion on content to continue growing its subscribers. The success of content such as Squid Game, which was reported to be the most-watched Netflix content of all time, underscores how well the company can pick winners. The question is, how quickly can investment turn into profits? That question was answered in the most recent quarter when the company delivered an 83% growth in profit on only 16% rise in revenue, suggesting the company can grow its profits meaningfully in the long run as long as subscriber growth continues at a solid rate.
Pundits have countered that argument by pointing to the company’s own Q4 guidance when Netflix forecasted Q4 revenue of $7.71 billion and net subscriber additions of 8.5 million, calling for respective growth of 0.4% and +2.2% above market expectations. Nevertheless, with more than 210 million global paid subscribers, Netflix is by far the industry’s king of streaming, ahead of recent streamers such as Disney, HBO Max (T) and Apple TV+ (AAPL). The company, however, must allay growth uncertainties on Thursday by beating on the top and bottom lines and guiding confidently.
For the quarter that ended December, Wall Street expects Netflix to earn 82 cents per share on revenue of $7.71 billion. This compares to the year-ago quarter when earnings were $1.19 per share on $6.64 billion in revenue. For the full year, Netflix’s earnings are projected to increase 76.6% year over year to $10.74 per share, while full-year revenue of $29.7 billion would mark an increase of 18.8% year over year.
Netflix has shown a willingness to re-evaluate its market position, along with its content spending approach to make the necessary adjustments to remain competitive. The strategy has worked, allowing Netflix to flex its muscle with timely price increases, including recently when the company announced plans to raise its rates for streaming subscriptions in the U.S. and Canada. This marked the second time it has done so during the pandemic, which led to massive subscriber growth until the recent slowdown.
In Q3, revenue grew just 16% to $7.48 billion, though it did beat estimates. Q3 EPS of $3.19 also topped estimates by 63 cents. The company added 4.38 million new global subscribers, above its own guidance for 1.54 million and analyst estimates for 3.5 million. While that brought its subscriber total higher by 2.2 million from a year ago, investors were nonetheless disappointed by the downbeat number.
On Thursday the market wants to see if Netflix can reaccelerate its revenue growth rate back up above 20%. Just as importantly, investors will want to know what the growth plan will be for 2022 and how Netflix will deploy its ample free cash flow.
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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