Is Netflix Stock’s Post Earnings Sell Off An Opportunity To Buy?

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Netflix (NASDAQ:NFLX) posted a tough set of Q1 2022 results, as it lost about 200,000 subscribers, its first net subscriber loss in almost a decade, causing the company’s stock to fall by over 35% in Wednesday’s trading. Netflix revenue fell short of estimates, coming in at $7.87 billion, with revenue growth rates cooling down considerably to 9.8% year-over-year, compared to 24% growth in the year-ago period. Reported earnings declined by 6% year-over-year to $3.53 per share, although they were ahead of consensus estimates.  For Q2, which is a typically a seasonally weak quarter, Netflix has guided that it could lose another 2 million subscribers, with EPS also set to decline.

There are multiple trends hurting Netflix. Firstly, the Covid-19-related tailwinds are easing for the company, as people rely less on streaming as a means of entertainment post the lockdowns. The company’s exit from Russia also had a one-time impact, as it apparently lost about 700,000 members. Competition is also getting more intense, with the likes of Apple and Disney gaining traction with their streaming products. It’s also possible that high levels of inflation are impacting subscriber growth, particularly in lower-income markets, where rising prices could be hurting discretionary spending.

We are reducing our price estimate for Netflix from $520 per share to about $400 per share, to account for the slower growth and competitive pressure the company is witnessing. However, our price estimate still marks a meaningful premium over the market price of about $225 per share. There are a couple of good reasons to remain optimistic about Netflix post the sizable correction in its stock. Based on the current market price, Netflix stock trades at just about 19x our projected 2023 EPS for the company. This is a reasonable valuation in our view, given that despite the near-term headwinds, Netflix is looking to sustain double-digit revenue growth, via multiple avenues including better monetization of shared Netflix accounts and potentially through a lower-priced ad-supported plan. Netflix is also looking to protect its operating margins in the interim, reiterating its 19% to 20% margin guidance for 2022, while noting that it intends to grow operating income at a quicker pace compared to revenues. Cash flows are also holding up nicely.  Free cash flows for the quarter improved year-over-year to $802 million, and Netflix has indicated that it expects to be cash-flow positive for the year, compared to 2021 when it burned cash. See our analysis Netflix ValuationExpensive or Cheap for more details on what’s driving our price estimate for Netflix. Also, check out on analysis on Netflix Revenue for more details on how Netflix revenues are trending.

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Returns Apr 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 NFLX Return -40% -62% 83%
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[1] Month-to-date and year-to-date as of 4/21/2022
[2] Cumulative total returns since the end of 2016

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