Netflix (NFLX -3.92%) reported 2021 fourth-quarter financial results last week, and although the company beat on both the top and bottom lines, what shareholders really care about are the subscriber numbers. The business added 8.3 million customers in Q4, slightly less than the 8.5 million management had forecast three months ago.
What really crushed the stock, however, was the Q1 projection of 2.5 million subscriber adds. Wall Street analysts were expecting 6.9 million new members in the quarter currently underway. Share prices fell more than 20% on the news.
Given this latest earnings report and the news surrounding it, what should investors do with Netflix stock? Is it a buy, a sell, or a hold right now? Let's try to find the answer.
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Netflix's focus is on the customer
The most important thing that Netflix investors need to focus on at this point, particularly in light of the subscriber miss and stock drop, is whether the company's service is still popular among consumers. If Netflix stopped producing compelling content, then I'd be worried. But with the monster success of shows like Squid Game and Money Heist, as well as recent movies like Red Notice and Don't Look Up, it appears as though the business still excels at entertaining viewers. And in 2021, Netflix had the most Emmy and Oscar nominations and wins of any studio out there.
Slowing growth is a situation competitors are dealing with as well, most notably Walt Disney and its Disney+ service. This is not a problem specific to Netflix. Netflix's first-mover advantage in the streaming space (and its 222 million members) allows it to have a massive content budget, which is needed in order to keep coming out with hit series and movies.
As a result, I still believe it would be the last streaming subscription consumers would cancel if they had to. In fact, according to Nielsen data, Netflix has a 7% share of total TV viewing time in the U.S., the most of any streaming service.
Because the pandemic severely disrupted the normal course of business for companies across every sector of the economy, quarter-to-quarter variability is expected. And these are still difficult times to try and predict financial results, primarily because we don't really know which shifts in consumer behavior are temporary and which are permanent. Netflix's leadership team is dealing with this firsthand.
From the customer's perspective, Netflix is still the top dog, with an exceptional value proposition that is increasing with the introduction of mobile games. And management just raised prices in the U.S. and Canada, a move that doesn't worry me given how much pricing power the company has shown historically.
Netflix's valuation looks attractive
Because I'm an investor with an incredibly long time horizon, I manage my portfolio with the mentality that whatever happens in any single quarter really has no effect on what a business will look like five or 10 years down the road. But Wall Street doesn't behave this way. And I can use the market's near-sightedness to my advantage.
As I mentioned above, Netflix stock immediately plunged more than 20% following the earnings report, and the company now has a market cap of $163 billion. The stock is also trading at a price-to-earnings ratio of just 32.8 -- the lowest multiple it has been at in almost a decade.
Admittedly, this is a more mature Netflix that probably won't grow at the fast clip we've seen in the past decade. But the streaming opportunity is still huge internationally, and Netflix is the leader in the industry. I believe investors are being presented with a very attractive risk/reward trade-off right now.
At the current stock price hovering around $370, Netflix stock looks like a screaming buy.
