The stock is down plenty and currently sits tantalizingly at pre-COVID levels, yet investors should be more than a little wary about Netflix (Netflix Stock Quote, Charts, News, Analysts, Financials NASDAQ:NFLX). That’s according to portfolio manager Ross Healy who thinks there’s trouble up ahead for the streaming giant.
“Netflix had a nice little little bounce with the market on March 14 and it has actually pounded right up against some nice technical resistance, [but] I don’t particularly like Netflix because the streaming industry is under intense competitive pressure,” said Healy, chairman of the Strategic Analysis Corporation, who spoke about Netflix on a BNN Bloomberg segment on Monday.
Netflix had has a huge pullback in recent months, in part aided by a general market rotation away from growth stocks which has hit the Big Tech names rather hard, but NFLX’s fall has also been a result of poor investor reaction to news from the company. In particular, Netflix’s share price dropped over 20 per cent immediately following its fourth quarter earnings, delivered in January, which spoke of slowing subscription growth, a perennial bugaboo that seems to keep the market on edge regarding the stock.
This time around, Netflix’s fourth quarter 2021 featured 8.28 million in global paid net subscriber additions, which was better than what analysts had on average expected at 8.19 million. Yet, it was the look ahead that seemed to have spooked the market. Management called for just 2.5 million subscription adds over the first quarter 2022, which would be well below last year’s Q1 adds at 3.98 million.
“We finished Q4 with 222 million paid memberships (with 8.3 million paid net adds in Q4). Even in a world of uncertainty and increasing competition, we’re optimistic about our long-term growth prospects as streaming supplants linear entertainment around the world. We’re continually improving Netflix so that we can please our members, grow our share of leisure time and lead in this transition,” said Netflix in a shareholder letter on January 20.
The comparisons may be tough, however, as 2020 and 2021 were huge growth years for pandemic-friendly industries, where the world turned toward a stay-at-home lifestyle which boosted sales in e-commerce, for example, and took to their streaming services in greater numbers.
And while streaming seems here to stay, with Netflix likely a long-term player in the space, it’s unclear how the field will play out in upcoming years. Will the reigning king of content keep its crown even as competitors like Disney and Amazon continue to pump up production and pull at Netflix’s market share? And how will customers respond in a post-pandemic environment as monthly subscription rates edge higher?
It’s anyone’s guess if and when COVID will clear enough for people to comfortably leave the sanctuary of their living room couch and accompanying flat screens, and with that we’re left wondering where Netflix is headed. And so, even with Netflix’s share price now down by almost half — having lost pretty well all of its COVID-era gains — it’s still a gamble as to whether NFLX will recoup that lost ground.
Healy has his doubts.
“As good as Netflix is (and I will freely admit that), in terms of generating earnings, we’re starting to see that the earnings forecasts and therefore the fair market value are tailing off,” Healy said.
“I’ve also looked at the long-term history of Netflix and it has been volatile like you wouldn’t believe. The fair market value is 45 per cent below the current price,” he said. “It’s not the kind of stock that I would want to put away.”
Ahead of first quarter 2022 earnings expected from Netflix on April 19, the company beat analysts’ profit estimate in its Q4 2021 financials, coming in with EPS of $1.33 per share compared to the expected $0.82 per share. Revenue was up 16 per cent year-over-year and arrived in-line with estimates at $7.71 billion. Netflix has guided for Q1 2022 revenue of $7.90 billion and EPS of $2.86 per share. (All figures in US dollars.)
On its forecast of 2.5 million paid net subscription additions for the Q1, Netflix said in its shareholder letter, “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).”
“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,” Netflix said.
Netflix stock finished 2021 with a return of 11 per cent, while so far in 2022 NFLX is down about 57 per cent.