Netflix Stock: Why This Streaming Giant Lost 10% In Market Value Last Week
May 06 2021 - 7:49AM
Finscreener.org
Shares of leading streaming platform Netflix (NASDAQ: NFLX) have
lost around 10% in market value in the last week and itU+02019s now
trading 14% below record highs. Netflix has underperformed the
broader markets this year after the stock crushed expectations in
2020. The COVID-19 pandemic acted as a tailwind for streaming
companies as economic lockdowns meant entertainment options were
limited. People were confined to their homes which
accelerated subscriptions for streaming services at a rapid
clip.
However, Netflix stock has now lost momentum year to date, and
let’s see why it experienced a pullback last week.
Netflix adds 4 million subscribers in Q1
Netflix reported its Q1 results on April 20 and disclosed it
added 4 million new subscribers in the March quarter. This was
significantly lower than management estimates of 6 million net
additions. Netflix sales were up 24% year over year at $7.16
billion while earnings more than doubled to $3.75 from $1.57 in the
prior-year period. While Netflix’s revenue figures were as per
expectations, its bottom-line surpassed estimates of $2.97 per
share.
Netflix has forecast revenue to grow by 19% annually to $7.3
billion in Q2 while adjusted earnings are expected to double again.
However, the company confirmed it estimates subscriber additions to
decelerate to 1 million in the June quarter.
In 2020, Netflix added a record 40 million new subscribers
taking its total account to over 200 million at the end of the last
year. However, the pandemic also meant that content production
slowed down significantly due to lockdown restrictions pushing back
multiple title launches and season premiers to the second half of
2021 which impacted customer additions in Q1.
While Netflix met revenue estimates and beat earnings forecasts
in the March quarter, investors were worried about the slowing pace
of subscriber growth in the near term, dragging the stock lower
last week.
Strong operating margin and cash flow
While Netflix has failed to impress in Q1, investors should note
that total subscribers were up 14% year over year. Its impressive
performance in 2020 has allowed the company to generate positive
cash flows, showcasing its resilient business model that can also
be considered recession-proof.
After several years of grappling with negative cash flows,
Netflix’s free cash flow stood at $692 million in Q1. Its robust
top-line growth also allowed the company to report an operating
margin of 27% and an operating profit of $2 billion in the March
quarter.
While Netflix will ramp up spending on content production in the
upcoming months, it expects to achieve break-even cash flow this
year. Netflix will be spending close to $17 billion in creating
original content in 2021 and the company’s management confirmed it
is close to being free cash flow on a consistent basis.
Netflix’s authorized share buyback program of $5 billion
indicates the management team is bullish on the company’s
cash-generating ability going forward. As Netflix expands and gains
traction in other international markets, its easily scalable
business will lower customer acquisition costs and allow it to
increase subscription fees and improve its cash flow position as
well.
What next for Netflix investors?
While Netflix stock has trailed the market in 2021, the company
remains a market leader in the streaming industry. Yes, it will be
impacted by rising competition from tech giants including Apple
(NASDAQ: AAPL),
Disney (NYSE: DIS),
Amazon (NASDQ: AMZN),
and AT&T (NYSE: T). But the
streaming space has enough room for multiple players to co-exist.
Further, Netflix believes the total number of subscribers it can
target is around 800 million, which suggests the company can
continue to grow top-line in 2021 and beyond.
Netflix is valued at a market cap of $225 billion. Analysts
expect
the company to grow revenue by 19% to $29.8 billion in 2021 and
by 15.4% to $34.4 billion in 2022. Comparatively, its earnings are
forecast to grow at an annual rate of 45% in the next five years.
This suggests Netflix stock is trading at a forward price to sales
multiple of 7.5x and a price to earnings multiple of 48.6x which is
reasonable considering its growth estimates.
Wall Street analysts tracking the stock have a 12-month average
target price estimate of $610 for Netflix which is 20% higher than
its current trading price.
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