Did Investors Overreact to Netflix's Latest Update?

Investors didn't respond well to Netflix's (NFLX -0.63%) recent earnings report, with shares falling more than 20% after the company released its fourth-quarter and full-year report on news that subscriber growth is continuing to slow. In this segment of Backstage Pass, recorded on Jan. 21, Fool.com contributors Rachel Warren, Jason Hall, Toby Bordelon, and Jose Najarro weigh in. 

Rachel Warren: Netflix, I'll hit that one. I think that this isn't insane. Like I read that it shed more than like $50 billion in market cap today, last I checked, and one of the things that was interesting, I was reading from the report that just came out for the most recent quarter, and management said, "Our service continues to grow globally with more than 90% of our paid net adds in 2021 coming from outside the United States and Canada region".

Nonetheless, that region added 1.2 million paid memberships in the fourth quarter versus 0.9 million in the prior year, which marked their strongest quarter of member growth in that area since the early days of COVID in 2020. I know that they are projecting slower growth. Their guidance was vastly under what analysts have been projecting, so I get that that's part of the reason behind huge decline in market cap.

But honestly, I feel like people are underestimating how much of the demand big the streaming service market, for example, just in Europe alone is. That's a $14 billion market as of 2021, probably much bigger in the years ahead.

I think that there's maybe, I don't know if there's like a lack of understanding of yes, North America is huge, but there's also a lot of opportunity abroad. It's not just here. I think it's a big overreaction. I don't think maybe we should expect Netflix to grow like it did in the early days of the pandemic, but I still think it's a good company.

Jason Hall: I first bought the stock at I don't know, 2006, 2007, somewhere around there. You go back a long ways, and I sold a few years ago. I lost interest. Some good things have happened. The company, maybe a year or so ago, they announced what we're not going to have to raise billions of dollars in debt anymore to fund our huge spending, we're going to fund it from our cash flow.

There's still taking all of their cash flow and they're having to use it just to stay ahead to maintain their leadership position. I mean, that's a great point. What's left over? Go ahead Toby.

Toby Bordelon: You look at their cash flow statement, you see that quite clearly.

Jason Hall: Yeah, and I'm not interested in that business, I'm really not. 

Toby Bordelon: Cash flow, but it's all getting content.

Jason Hall: Yes. They're talking about video games, bringing that service on for that, which is interesting. To me that's like a screaming, hey our opportunities to grow in video entertainment are limited. When they were saying we're going to add this other channel. I'm just not interested.

I'd rather find companies that are Netflix 10 or 15 years ago and whatever opportunity it is, and there's tons of them out there. There's tons of them out there and right now there's a hell of a lot of them that are far more attractively priced today, than they were six months ago. So yeah, I'm not interested in Netflix.

Jose Najarro: I think for me the biggest issue for Netflix, it's not necessarily a bad thing, but it's just no longer the growth story it was before. Just because you're no longer the growth story doesn't mean you are a bad company, just you're a different company than before. I think revenue was 16% year-over-year growth, which was one of their slowest and for their guidance, they gave revenue growth of about 10%, which would be their lowest numbers ever in forms of revenue growth.

A few things I did enjoy. One, they expect to be finally free cash flow positive by the end of 2022. That's pretty cool. A few things that I didn't like. First is we are seeing this huge growth international, but they are seeing some issues there. For example, in India, there's a huge amount of competition in India, so they had to lower their prices in India to meet competition there.

Then Latin America, it's growing a little bit slower than they expected. Like Jason mentioned when they entered the video game market, it sounds cool, but at the same time, just like Jason, it shows that, hey, maybe the video market right now is not as high growth as we intended. They're still in early stages here in the video game. They're saying they're getting good results.

But I personally don't know anybody that has gone and played their games for more than just testing it out for maybe a few minutes, so I don't know how well that's really doing. Another thing that I saw, they launched a website called Tudum, which is a way to build fandom. It shows behind the scenes of some of those shows that they talk about interviews, and to me that's a pretty cool concept of creating a website.

But we already have plenty of websites that already drive plenty of eyes from users YouTube, Twitter, Instagram so I personally would have wanted them to focus that money instead of inventing some new website on focusing on probably making a better social platform to just increase their overall viewership or fan base.

But I thought earnings weren't bad. I can't see why the stock would have dropped that much though.

Toby Bordelon: Thanks guys. Sometimes I wonder, following up on your comments, Rachel. Maybe it is an overreaction but is it an overreaction right now, or were we overreacting to overly optimistic prospects weeks ago, right? 

Jason Hall: I think it's both. It's just like Upstart. Upstart fell when an analyst reset their price target to a higher price than the stock was before he reset it and the stock still fell 15%, 12%. It's just where we are in the market cycle. It happens. It stinks. It's part of the deal. 

Toby Bordelon: The way it goes sometimes. But I do agree with you Jose it's a fine company, a good company whether it remains to be a great investment from here, we don't know, but I'm not sure I'd be a seller.