Here’s your chance to own Netflix, Barry Schwartz says

You watched their shows all throughout the pandemic but you’ve also been watching the share price for Netflix (Netflix Stock Quote, Charts, News, Analysts, Financials NASDAQ:NFLX) over the past couple of years. First there was the big drop in February and March of 2020 with the rest of the market but then, what in hindsight is a surprise to no one, pandemic-friendly stocks like Zoom Communications, Amazon and Netflix did incredibly well, bouncing back from early 2020 lows to all-time highs as accelerated revenue growth caused the multitudes to pour into these stocks.

For Netflix, the party kept going until just a few months ago when the market decided to make a U-turn right around November and growth-oriented names became instant pariahs. The result? NFLX is now right back where it started at pre-pandemic levels.

And while that may be a problem for some traders out there, for those more interested in the long-term strengths of a company like Netflix, today’s scenario should be seen as an opportunity. So says portfolio manager Barry Schwartz of Baskin Wealth Management.

“The market is just hating on all these [growth] companies and sells [them] every day, so we’re just going to accumulate them,” said Schwartz, speaking on BNN Bloomberg on Thursday. “We’re going to continue to buy them and we’re going to look past the negative sentiment.”

“What was last will be first because what was first is now last, unfortunately. We’re suffering from multiple contraction on a lot of these stocks. That’s what happens when they go down,” he said.

Streaming giant Netflix has seen its share price carved almost in half over the past few months as investors vacate the stock in droves amid signs of slowing subscription growth. The most dramatic drop came in January after the company released fourth quarter 2021 numbers that while meeting or surpassing consensus estimates were suffering from tough year-over-year comps.

Netflix hit $7.71 billion in revenue for the fourth quarter compared to $6.64 billion a year earlier for a grow rate of 16.0 per cent, which was lower than previous quarters including Q4 2020 which delivered 21.5 per cent topline growth. Diluted EPS was $1.33 per share compared to $1.19 per share a year earlier, while analysts had on average forecasted Q4 revenue of $7.71 billion, on the nose with the result, and EPS of $0.82 per share.

Similar results were on subscribers where Netflix added global paid net subscribers of 8.28 million versus the 8.19 million call from the Street but lower than the 8.51 million added over Q4 2020. 

The company’s first quarter 2022 guidance showed the same trend, with management forecasting $7.903 billion in revenue for a year-over-year growth rate of just 10.3 per cent and only 2.50 million subscriber additions.

“Our guidance reflects a more back-end weighted content slate in Q1’22 (for example, Bridgerton S2 and our new original film The Adam Project will both be launching in March),” the company said in a January 20 letter to shareholders. “In addition, while retention and engagement remain healthy, acquisition growth has not yet re-accelerated to pre-Covid levels. We think this may be due to several factors including the ongoing Covid overhang and macro-economic hardship in several parts of the world like LATAM.”

The result was an immediate 20 per cent decline in share price, one from which NFLX has yet to recover, meaning that in total the stock has lost about 47 per cent of its value compared to its November highs and at around $360-$370 per share the stock is now trading exactly where it was in the later months of 2019 and early 2020.

But Schwartz thinks the company has a lot going for it and the future continues to look very bright.

“Netflix had one of the greatest years in the history of business in 2020 — so many new subscribers, it was able to raise prices, the content is a utility and no one is canceling. But the [recent] guidance was underwhelming,” Schwartz said.

“People are looking for Netflix to continue to grow to the moon — these companies are not going to grow to the moon, but what we think is going to happen in a couple of years is the revenues are going to grow double-digits, the cost of making films and TV is going to slow, the free cash flow is going to be dramatically higher and Netflix is going to be going from over-levered, which it was a couple years ago, to well under-levered,” he said.

“We’re still excited about the types of things that Netflix can offer, so this is an opportunity. Once again, some of the greatest companies in the world [which are] very profitable. They were COVID winners and they’re now COVID losers, but we still like [Netflix] for the long term, absolutely,” Schwartz said.