Over the past few months, the high-growth and technology stock market has been savage. Investors concerned about interest rate hikes by the Federal Reserve and the Russian invasion of Ukraine saw a steep drop in several stocks following the release of fourth-quarter earnings reports in January and February.
One of these companies was Netflix (NFLX -3.62 percent), a premium video streaming service. On the day following Netflix’s results announcement at the end of January, the Netflix stock dropped by 20% and has already fallen by 40% year to date. While price declines of this magnitude can be disconcerting, they can also present excellent purchasing opportunities for long-term investors.
Is it a good time to buy Netflix stock? Let’s take a look.
Impressive Q4 Results, but the Unclear Forecast
Netflix released its third-quarter 2021 earnings report on the 20th of January. Netflix’s revenue and subscriber statistics were in line with expectations. Over the past year, revenue increased by 16% to $7.7 billion, while the number of subscribers worldwide increased by 9% to 222 million people. Netflix’s pricing increases in the U.S. and Canada (UCAN) area are causing revenue growth to outpace subscriber growth. Last quarter, UCAN’s average revenue per customer was $14.78, an increase of 9% over the previous year.
Subscriber guidance for the first quarter of 2022 was the company’s lone blemish in its earnings report, and it was a major factor in the stock’s subsequent decline. Compared to Wall Street’s 7 million subscriber forecast, management expects to attract only 2.5 million new customers in Q1. There isn’t really a massive problem with Netflix’s moderate prediction, but it is significantly lower than the company’s prior subscriber growth numbers. If this tendency continues, sales growth will be smaller in the next few years.
Fears of interest rate hikes and a Russian invasion of Ukraine have contributed to a general market sell-off, which has harmed Netflix. After Netflix’s disappointing forward guidance, the Nasdaq 100 Index is down nearly 15% for the year, further exacerbating the sell-off.
The Potential Sources of Future Growth
Given that Netflix already has 222 million paying subscribers around the world (and that many users shared accounts to access the service), many investors are doubtless wondering how much more money Netflix can make from paying customers in the coming decade. When it comes to Netflix’s revenue and profit/cash flow growth, this is the most important question investors need to answer before making a purchase.
UCAN’s growth will most likely be limited to price rises. In an area with 75 million active accounts (remember, many of these accounts are shared among family and friends), there aren’t many people remaining to sign up for the service. There are currently 74 million subscribers in Europe, the Middle East, and Africa, 40 million in Latin America, and 32.6 million in the Asia Pacific area.
For the next three to five years, Netflix plans to invest extensively in local content for each of these regions, which should keep membership growth steady. The number of Netflix subscribers should soon surpass that of UCAN, despite the fact that many countries’ subscriptions are cheaper due to the fact that all three places have higher populations than UCAN.
The Valuation Has Become Much More Reasonable in Recent Years
It is estimated that Netflix is currently valued at $159 billion. The company is worth $165 billion when you factor in its debt of $15 billion and its cash on hand of $6 billion. The stock has a trailing enterprise value-to-operating-income ratio of 26.6, which is in line with the market average. Investors can expect Netflix’s earnings multiple to decrease over the next several years if the company can continue to expand its revenue while simultaneously achieving operational efficiency.
Investors should keep an eye on the conversion of operating income to free cash flow (FCF) as a possible issue. Netflix’s FCF in 2021 was a negative $158 million. Netflix continues to invest substantially in content around the world in order to build its subscriber base and the value of the Netflix service, which causes a gap between operating income and FCF. To be a good long-term investment in Netflix stock, investors must anticipate a convergence of free cash flow (FCF) and operating income (OPI).
Is Selling Netflix Stock Is a Good Idea?
Netflix’s subscriber growth may be slowing or possibly reversing. After the epidemic, the company saw an increase in new customers, but if more entertainment options become available, some of these customers may abandon their subscriptions.
During the Netflix pandemic, one of the disadvantages was the proliferation of new streaming services. Studios with deep pockets are now posing a serious threat to Netflix after a decade of largely open skies.
Adding insult to injury, the new entrants are eager to take on subscribers at the expense of operating losses in their streaming services. Netflix has a market share of less than one percent of the newcomers’ offerings. In the first quarter of 2022, the company expects to attract only 2.5 million new subscribers, 5.9 million fewer than the average first-quarter increase over the previous five years. Management has already acknowledged the slowing pace.
Is Netflix Stock Worth the Investment?
For investors who are confident in the company’s future subscriber growth and FCF’s convergence with operating income, I believe Netflix is a good buy at this point, given the stock’s fair earnings multiple. If and when this occurs, Netflix’s revenue will continue to rise at a rate of 10% or more per year, and its cash flow will continue to expand as well. As a result of this financial expansion, stock price returns will eventually stabilize.