The longtime streaming king has suffered a notable correction in recent months. Netflix (NFLX -0.70%) shares enjoyed an impressive rally starting in late March 2020 through the first half of 2021, as demand in response to the pandemic soared. With COVID-19 keeping us at home, more people were inclined to watch content on Netflix.
The tables have turned as of late. Fear of rising interest rates and newer concerns around the Russia-Ukraine crisis have sent tech stocks tumbling. It's not uncommon for investors to exit positions in growth stocks during times of macroeconomic uncertainty. And to put icing on the cake, Netflix released undesirable forward guidance in late January that sent shockwaves across Wall Street. In light of all this, let's discuss whether Netflix's current slump offers investors a good buying opportunity today.
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Disappointing start to the year
Netflix shares are down 45% year to date owing to macroeconomic headwinds and fear of growth unwinding, which was discussed in the company's latest earnings call. The problem wasn't in Netflix's fourth quarter performance. The company generated $7.7 billion in revenue and an earnings per share of $1.33 for the quarter, beating Wall Street estimates on both fronts. Management's forward guidance is what rattled investors -- it appears that Netflix's growth is decelerating more quickly than anticipated. Macroeconomic conditions related to the ongoing war and changes in monetary policy continue to worsen. And while Netflix's operations may not be directly affected by these events, tech stocks as a whole are facing significant downward pressure.
In its fourth quarter, Netflix's paid memberships grew by only 8% -- up to 221.8 million. Management expects the company to add 2.5 million members in the first quarter of 2022, which is considerably lower than the 4 million subscribers it added in the same quarter a year ago. Analysts were forecasting Netflix to tally 6 million new members in the upcoming quarter, or 58% more net adds than management's new guidance.
Total revenue in Q1 2022 is estimated to end at $7.9 billion, translating to a mere 10% growth year over year. Earnings per share is forecasted to decline by 24% year over year down to $2.86. The combination of slowing growth, economic insecurity, and geopolitical concerns have fueled the sub-optimal performance of Netflix shares so far in 2021. While some argue that the company's current price movements can be attributed to short-term noise, investors must consider several long-term downsides before buying Netflix today.
Will Netflix rebound?
Increased competition will continue to exert pressure on Netflix's top and bottom line growth moving forward. The video streaming industry is becoming increasingly crowded, and many of Netflix's key competitors are enormous enterprises with a plethora of resources to enhance their streaming businesses. Companies like Apple (AAPL 0.51%), Amazon (AMZN -1.41%), and Disney (DIS 0.63%) all offer alternatives to Netflix that will continue testing the company's market share in the years ahead. A report by Ampere Analysis found that Netflix's market share in the United States fell from 29% to 20% in April 2021. I wouldn't be surprised to notice a similar pattern moving forward as more players enter the video streaming market.
Netflix's growth is projected to ease up beyond 2022. The company's fiscal year 2025 consensus revenue estimate is $46.8 billion, representing an average annualized growth of 9.5%. This is significantly lower than Netflix's five-year revenue compound annual growth rate (CAGR) of 27.5%. A similar trend can be observed when examining forward earnings estimates -- analysts are forecasting an earnings per share of $21 in 2025, suggesting an average annualized growth of 13%. Again, this is weaker growth than the company's five-year diluted EPS CAGR of 92%. Many investors have bought into Netflix's growth story over the years. As growth continues to hit the brakes, it's possible that these investors exit their positions in Netflix and look for opportunities elsewhere.
I'd pass on Netflix for now
Netflix has been a wonderful company to shareholders in the past, but the days of robust growth and incredible returns are likely over. Economic volatility and geopolitical troubles will continue to apply pressure on Netflix's share price in the short-term. More importantly, however, risks associated with decelerating growth and rising competition could hurt Netflix in the long run.
I think there are more actionable investment opportunities at play in today's market. Netflix carries more risk relative to potential reward than it once did. As a result, it might be wise for investors to remain on the sidelines for now. Great companies aren't always great investments -- a statement I think applies aptly to Netflix as of today.
