One of the biggest winners of the coronavirus pandemic was Netflix (NFLX -0.25%). This top media business saw its stock price soar 67% in 2020, supported by a growing user base. With people stuck at home, the company experienced pulled-forward demand last year.
During the first nine months of 2021, however, Netflix added just 10 million subscribers, and the stock has significantly trailed the S&P 500 this year. The streaming industry is becoming increasingly crowded with new rivals coming to market, and with economies slowly opening back up, consumers want to enjoy other leisure activities.
What does next year hold? Can Netflix's stock price reach $700 at some point in 2022? Let's find out.
Productions are up and running
The pandemic caused major production delays in 2020, leading to a lighter content slate for Netflix at the beginning of this year. Therefore, it shouldn't surprise anyone that membership growth in the first half of 2021 was weak.
But management has said that productions are largely back up and running. The company is currently producing local content in 45 different countries. As my colleague Adam Levy points out, streaming services need to introduce new hit series to gain new customers.
And this costs money. Luckily for Netflix, it has deep pockets and will end 2021 having spent $17 billion in cash on content. Management expects the current three-month period to be the strongest fourth-quarter content offering ever, something that will help bring new customers to the service.
"Assuming no new COVID waves or unforeseen events that result in large-scale production shutdowns, we currently anticipate a more normalized content slate in 2022, with a greater number of originals in 2022 vs. 2021," the leadership team highlighted in the Q3 shareholder letter.
When it comes to Netflix, Wall Street unsurprisingly fixates on one data point above all else: subscriber growth. This drives the stock price. Having fresh shows and movies on tap for 2022 will help expand the user base, which supports revenue and profit growth.
Don't count this winner out
I think it's completely realistic for Netflix to reach $700 a share by the end of 2022. Based on Dec. 21's closing stock price of $605, this would imply a roughly 16% appreciation.
After a couple of lumpy years, I think it's fair to assume that Netflix can add 25 million subscribers in 2022. This is in line with the growth in recent years, in the range of 25 million to 30 million member additions per year. Including estimates for the fourth quarter of 2021 and all of next year, the business should end 2022 with approximately 247 million customers.
Now, what the stock price does depends on how much Netflix's results can surprise Wall Street to the upside. With Walt Disney's Disney+ service reporting disappointing subscriber growth of 2.1 million in its latest fiscal quarter, I suspect the sentiment for streaming companies is weak heading into the new year. Moreover, reopening economies add pessimism for streaming services, which tend to benefit from lockdowns and anti-pandemic policies.
Therefore, if Netflix increases its customer base by 25 million next year, which is outstanding growth in any case, I see the stock rising meaningfully. What's more, expanding profitability and positive free cash flow in 2022 will boost optimism surrounding the business.
Analysts forecast Netflix's earnings to grow 23% in 2022. Even if the current price-to-earnings ratio of 55 comes down slightly, the stock will likely hit $700 in 12 months. Factoring in the likelihood of positive surprises when the company reports quarterly results throughout the year, $700 per share might be a conservative price target.
Even a more mature Netflix can provide outstanding returns for shareholders in 2022.