NFLX: Down 44% from Record Highs, Is Netflix Stock a Buy?
January 27 2022 - 11:55AM
Finscreener.org
Netflix (NASDAQ: NFLX)
released its
fourth-quarter financials
for 2021 on Thursday, January 20,
after the close of market hours. On Friday, its stock plunged over
20%. The company didn’t meet analyst expectations and its outlook
for Q1 of 2022 said it
expects a slowdown
in subscriber growth. Netflix’s Q4
numbers had more misses than hits. However, was the plunge an
overreaction, and does the drop make Netflix a smart
buy?
The markets are in correction
mode and a lot of COVID-19 winners like Peloton and Zoom have seen
stock prices take a hit as markets believe their products will no
longer be consumed as the pandemic recedes. The same logic has been
applied to Netflix stock as well which has now lost 45% from
all-time highs.
Key Financial Numbers
Netflix added 8.28 million global
paid net subscribers in Q4 of 2021 mostly driven by growth outside
of the North American market. This was higher than Wall Street
estimates that pegged subscriber growth at 8.19
million.
However, it was less than 8.5
million subscribers that Netflix added in Q4 2020. But what really
crushed NFLX stock was that the company now expects to add only 2.5
million subscribers in Q1 of 2022. This is massively lower than the
6.93 million subscribers that the markets expected, according to
CNBC. For context, Netflix added 3.98 million subscribers in Q1
2021.
Netflix’s global paid streaming
memberships increased 8.9% year-over-year in Q4 and this was the
second slowest pace of growth observed in the past fourteen
quarters. The increased competition in the market with rivals like
Apple TV (NASDAQ: AAPL),
Disney+ (NYSE:
DIS), or Amazon Prime
Video (NASDAQ:
AMZN) has made it quite
difficult for Netflix to attract new subscribers and the company
feels this factor is affecting its marginal growth to some extent.
Therefore, now it has to spend more on enhancing its content
quality which in turn will impact its operating margins.
Revenue for Q4 was $7.71 billion,
a 16% year-over-year growth with a 7% year-over-year increase in
average revenue per Membership (ARM). The last time such low
revenue growth was noticed in the company’s earnings was four years
ago.
Netflix had negative free cash
flows amounting to $569 million in Q4 and this was the third
consecutive quarter where the company reported a negative free cash
flow.
Is it all bad for NFLX stock investors?
Netflix delivered a large number
of big hits in 2021 including Squid Game which was released by the
end of the third quarter. It broke global records and generated
1.65 billion viewed hours within the first four weeks of release
and now is one of its biggest TV shows on the planet.
Netflix accounted for six out of
the 10 most searched shows globally while its films represented two
of the top 10. In November, Netflix debuted its mobile games
experience globally on Android and iOS. With this members will now
be able to discover and launch games from within the Netflix mobile
app. Besides, in 2021 it has launched a total of ten
games.
Netflix is growing. However,
markets are complaining that it is not growing fast enough. It has
222 million paying customers, among the highest for streaming
services worldwide. And more importantly, the company doesn’t shy
away from the hard talk. CEO Reed Hastings was candid enough to
admit that its lack of success in India, one of its biggest
potential growth markets, was “frustrating”.
It is possible that these results
mark the end of Netflix’s ‘rapid growth phase’. The company will
continue to grow, just not at the same speed it has been growing
for the last 10 years. This means it will keep adding new content
and new subscribers, making NFLX a buy. It is also possible that
Netflix’s stock plunge is merely the precursor to a broader market
correction. If that happens, it is possible that Netflix’s price
will fall further. I would say, it’s time to keep cash handy to buy
more Netflix stock.
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