Although Netflix (NFLX 5.54%) beat Wall Street analysts' estimates for fourth-quarter earnings and subscriber growth (and matched revenue expectations), its stock is down 19% since the company reported results on Jan. 20. Fueling the sell-off was management's forecast for new subscriber growth of just 2.5 million in the current quarter, far less than the consensus expectation of 6.9 million.
Followers of Netflix know that nothing drives the stock price more than its subscriber numbers, so to see executives provide disappointing guidance for the first quarter is not the best sign for shareholders. So is Netflix's reign over the streaming market in trouble? Or is this just a temporary speed bump for the business?
Continue reading to find out.
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Near-term headwinds aren't unique to Netflix
The company certainly had some demand pulled forward during the depths of the pandemic, particularly in 2020. And in 2021, the after-effects were felt as Netflix added just 18.2 million paid subscribers, compared to 36.6 million the previous year. As people return to some kind of normalcy with less time spent stuck at home, Netflix undoubtedly faces weaker demand for its streaming service.
Part of the reason for the disappointing guidance this quarter is a content slate that's weighted heavily toward the end of the period, a situation that could result in strong member sign-ups in the second quarter. To paint a brighter picture, management did mention that retention and engagement remain healthy.
But there's still the ongoing pandemic that's causing uneven economic recoveries in different markets across the world. Management called out Latin America, the weakest-growing international segment in the fourth quarter. Trying to predict results in the current economic environment is a difficult task for any business, not just Netflix.
The difference between management's guidance for 2.5 million net additions in the current quarter and Wall Street's 6.9 million is tiny when you consider the company's gigantic user base. Therefore, I'd take the variability in the company's results with each passing quarter with a grain of salt. The long-term story still remains intact, as I'll touch on below.
Entertaining the world is still management's goal
Guidance for one quarter, no matter how disappointing, can't tell us a company's whole story. If we step back, we can easily see that Netflix, with its 221.8 million paid subscribers and full-year 2021 revenue of $29.7 billion, is still in the best position to lead the burgeoning streaming market.
There are an estimated 1.3 billion broadband subscriptions and roughly 1.1 billion cable-TV households worldwide. Despite the intense competition in the streaming landscape, there is still a massive opportunity for industry players to add more viewers on a global scale.
Netflix has proved it can create award-winning content that transcends borders, bringing stories in one country's local language to audiences in other nations. "And now, we were betting that you could take films and series from anywhere in the world and entertain the entire world," co-CEO and Chief Content Officer Ted Sarandos highlighted on the fourth-quarter earnings call.
I'm starting to think Netflix is a consumer staple, meaning that even in recessionary times, people would hesitate to cancel their subscriptions. That's because despite continued price hikes in the U.S. and Canada, it's still one of the best entertainment offerings consumers have at their disposal.
Current valuation and financial situation are compelling
With the stock under heavy selling pressure recently, Netflix's valuation, based on price-to-sales and price-to-earnings, is the most attractive it has been in many years. This shouldn't come as a surprise, given the share price has fallen 42% from the all-time high it reached in Nov. 2021.
Data by YCharts.
But investors today are getting a business that is on the cusp of sustainably producing positive free cash flow. And management is keen on returning excess capital back to shareholders via stock buybacks, which boost earnings per share.
Pershing Square Capital Management, a hedge fund headed by famed investor Bill Ackman, recently scooped up 3.1 million shares of Netflix following the financial release and subsequent price crash last month. Ackman is known for purchasing high-quality businesses at attractive valuations, and it may be a wise choice for retail investors with a long-term mindset to follow his lead.
Yes, Netflix's first-quarter guidance was disappointing, but I'm not too worried. You shouldn't be, either.
