After years of strong growth, Netflix's stock plunged to a 4-year low recently. So is it still worth investing in Netflix?
During the COVID-19 pandemic, people all over the world were cooped up at home and depended heavily on technology for entertainment. As a result, streaming services including Netflix greatly benefited and saw a huge growth in subscribers.
However, as restrictions eased and ‘normalisation’ returned, so did entertainment options. Additionally, competitors also launched their own streaming services or have improved their content catalogue. With more entertainment options and increased competition, fewer people turned to Netflix subscriptions.
With Netflix’s stock falling, you may be wondering if it’s a good time to buy the dip.
Why did Netflix's share prices fall?
- Huge loss in subscribers and poor earnings due to stagnant growth
- Increased competition from competitors
- Macroeconomic factors such as Russia-Ukraine war and inflation
Huge loss in subscribers and poor earnings due to stagnant growth
In its Q1 2022 quarterly report, Netflix reported several unexpected metrics:
- Its subscriber base fell by 200,000 vs 2.51 million growth expected by analysts. Netflix has also lost 700,000 subscribers as a result of suspending its service in Russia
- Lower-than-expected revenue of US$7.87 billion vs US$7.95 billion expected
- Net profit also fell 6.4% from US$1.7 billion to US$1.6 billion
- To make matters worse, Netflix also projects a loss of 2 million subscribers in Q2 2022
In the wake of the disappointing news, Netflix lost US$54 billion of its market cap in a day, marking the streaming giant’s largest single-day decline in its history. Its shares also plunged to a 4-year low (since January 2018).
Increased competition from competitors
Netflix started as a DVD-by-mail service company but got into the streaming business in 2008. It began developing its own user base on the back of other companies’ popular content, and reruns of Friends and The Office became extremely popular among younger audiences.
At that time, Hollywood hadn't caught up with the potential of the streaming business and so major studios like Disney, Warner, and Sony licensed their content to Netflix, the biggest player among Hulu and HBO Go.
However, these companies eventually realised that by licensing their content to Netflix, they were helping a major competitor. So, they launched and built their own streaming services.
They also took back their most popular titles that used to run on Netflix and put them on their own streaming platforms. For instance, Friends is on HBO Max and all the Marvel/Disney titles are on Disney+.
This meant that Netflix, which had spent years syndicating content from other studios, suddenly lost a big chunk of their content library.
To avoid the reliance on licensed content, Netflix invested heavily in creating original content. Over the years, Netflix has produced several original content hits such as Squid Game, Better Call Saul, Stranger Things, All of Us Are Dead, and Money Heist.
That said, their competitors have matched them in producing high-quality content too. For instance, Disney+ has all the Marvel, Pixar, and Lucasfilm intellectual properties such as WandaVision, Obi-Wan Kenobi, and The Mandalorian, while Apple has the critically-acclaimed Ted Lasso.
On top of the challenges that Netflix already faces, the company also has to deal with the threat of inflation and a potential recession. In fact, Netflix’s stock has fallen more than 70% year to date.
With interest rates on the rise and the U.S Feb expected to further increase interest rates to curb inflation, this will bring further pressure on tech stocks such as Netflix.
As the cost of living goes up, consumers may also trim their budgets which includes cutting down on expenses such as Netflix subscriptions.
Will Netflix bounce back?
To make up for lost subscribers and revenue, Netflix is reconsidering some of its policies and strategies.
In the past, the company encouraged password sharing as it wanted to get more eyeballs. But with a drop in user base, the company has said that it’s clamping down on account sharing and working on ways to monetise these users. Netflix estimates that there are more than 100 million people sharing accounts.
After spending years dismissing the possibility of advertising on the platform, Netflix also said that it will be introducing a cheaper ad-supported version of the service in 2022. This is despite the fact that Netflix has raised its subscription prices six times since 2014, making it the most expensive streaming service subscription.
Netflix’s subscriber growth has also fallen from 31% year-on-year in 2014 to 7% year-on-year in the trailing 12 months ended in Q1 2022.
Its year-on-year revenue growth rate since 2014 has also fallen from 26% in 2014 to 15% year-on-year in the trailing 12 months ended Q1 2022.
The company’s free cash flow also amounted to US$802 million, compared to US$692 million a year ago and the positive cash flow has allowed the company to spend on content without heavily depending on investors’ money. In fact, it has one of the biggest budgets among its competitors; in Q1 2021, the company spent over US$17 billion on content.
That said, despite increasing content spend, it’s not enough to prevent a fall in subscriber growth year on year.
While the above data may seem like Netflix is a company in trouble, it’s far from the truth. For starters, despite reporting a lower revenue than analysts’ forecasts, the US$7.87 billion revenue generated is still 10% higher than the previous quarter.
While the loss in subscribers in its recent earnings report made headlines, the reality is that Netflix remains the largest streaming platform by a huge margin. Globally, it has 222 million subscribers. Its closest competitor, Disney+, has 118.1 million subscribers.
Netflix is also exploring other areas for growth, including mobile games. In fact, Netflix has acquired four game studios in recent years to expand its growth. It currently has 22 video games on its platform and aims to have 50 by the end of 2022.
Aside from that, Netflix also has listed several job openings in gaming and hired former employees in the gaming industry, including Mike Verdu who was formerly at Electronics Arts and Facebook’s Oculus and is now Netflix’s Vice President of game development.
Is Netflix’s stock good value?
Despite its recent shortcomings, Netflix still has a lot of room to grow and become even more profitable.
With profits expected to rise by 43% over the next two years, the company is in a good financial spot. Furthermore, the higher cash flow will increase its share valuation.
From 2015 to 2021, it also increased its earnings-per-share (EPS) from US$0.28 to US$11.24.
According to Morningstar, Netflix stock is currently trading below the industry level and can be a solid buy for those looking to invest in growth companies that are trading at a large discount.
That said, the company has recently laid off more than 300 of its employees amid slowing revenue growth. Combine that with the poor performance of the market in general, it's best to access your risk appetite before committing.
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