Shares of Netflix (NFLX 0.73%) crashed hard on Friday, following a solid earnings report with weak next-quarter guidance. We've seen this film a few times before, and it always had a happy ending. The latest remake should look very familiar in hindsight, and Netflix strikes me as a fantastic buy at these lower prices.
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What happened on Thursday?
Netflix stock fell as much as 25.2% on Friday, even though the company crushed Wall Street's earnings estimates in the fourth quarter of 2021. Earnings rose 12% year over year to $1.33 per diluted share, while revenues increased by 16% to $7.71 billion. Your average analyst would have settled for earnings near $0.82 per share on sales in the vicinity of $7.72 billion.
Subscriber growth also landed almost exactly where management expected. The company added 8.28 million net new subscribers, a rounding error away from guidance of 8.5 million.
Netflix investors started slamming their "sell" buttons when they saw management's subscriber-count guidance for the next reporting period. The company expects just 2.5 million new accounts in the first quarter of 2022. That would be the slowest first-quarter subscriber growth since Netflix broke out digital streaming accounts into a separate business. It would also be the slowest quarterly subscriber growth since the second quarter of 2016, not counting the highly irregular results of the coronavirus pandemic.
What happened in 2015 and 2016?
Let's look back at some of Netflix's earlier crashes based on subscriber-count guidance.
The third-quarter report in 2015 triggered an 8.3% sell-off in Netflix stock the next day. In that report, every result came in at or above expectations, but subscriber guidance for the all-important fourth quarter looked soft at just 5.15 million. When the fourth-quarter update rolled in, Netflix had collected 5.6 million net new users. If you bought Netflix shares on the eve of the third-quarter report's haircut, you'd have a 289% return on that investment right now.
Netflix investors were nervous again the next summer. The company gained 1.7 million accounts in the second quarter, below the guidance target of 2.5 million. Share prices plunged 13% lower the next day. Several analysts said that the domestic market for streaming services was nearing total saturation at 46 million domestic subscribers.
In this report, CEO Reed Hastings explained to investors that the global user base of 79.9 million paid members has been prone to bigger swings from one quarter to the next, compared to the 30 million accounts seen at the end of 2012.
"With our large subscriber base, slight variances in retention versus forecast can result in significant swings in net adds, particularly in a seasonally small net add quarter like Q2," Hastings wrote.
An investment started on that day shows a 354% return today.
As for that dreaded market saturation, Netflix now has 75 million subscribers in its U.S. and Canada region, including approximately 19 million Canadians. That's 22% above the 2016 reading, proving that the streaming market had lots of room left to grow.
Netflix is a screaming buy now
Past results are no guarantee of future returns, of course. History is not guaranteed to repeat itself. However, Netflix bears appear to be just as blind to seasonal swings and the math of large numbers as ever, as they overreacted to the soft first-quarter subscriber guidance target.
Netflix shares are now trading at prices not seen since the spring of 2020, erasing all the gains of the COVID-19 lockdown boom. The stock was undervalued before this report. Now, it's arguably the best buy on the market. This crash will be remembered as a tremendous buying opportunity in a couple of years, much like the customer growth overreactions of 2015 and 2016 or the Qwikster debacle of 2011.
