Video-streaming giant Netflix (NFLX -1.74%) has suffered at the hands of disappointed investors in 2022. To begin with, the first quarter's early going led to weak subscriber-growth guidance in January's fourth-quarter report. Then, the downturn accelerated during the quarter and Netflix fell short of its modest guidance target. Furthermore, management expects the softness to continue for a few more months, so guidance for the second quarter called for the loss of 2 million accounts in the next report.
Investors hated all of these growth-stunting moves. Netflix shares took a steep fall in January and another one in April, and the stock now trades 70% below the all-time highs of last November.
However, the brutal price correction looks like a massive overreaction. Let me show you what I mean.
This chart speaks volumes
A picture speaks a thousand words, right? So here's a short essay worth roughly four pages of double-spaced text:
As you can see, Netflix broke out far above the long-term trend line at the onset of the coronavirus in 2020. The chart then stayed afloat at roughly the same trajectory as before, but at a higher level than expected. This phenomenon is known as a "pull-forward" of growth trends expected to play out a bit later.
Netflix's management has been calling it a pull-forward since the beginning, never attempting to sweep this temporary boost under the rug.
And the messaging hasn't changed. For example, Netflix co-CEO Reed Hastings still referred to the pull-forward in last week's first-quarter earnings call: "COVID created a lot of noise on how to read the situation, boosted us a lot in 2020. And then in 2021, I think we thoughtfully said it was mostly pull-forward, which was the logical conclusion."
Netflix as a deep-discount value investment
The steep decline in user growth may very well be a simple return to a normal baseline. I won't be surprised if we look back at the same chart in a year or two, noting that the long-term trajectory remains stable -- with a temporary lump of short-lived upside in 2020 and 2021. Maybe it's just time to reset the user-base expectation, recalibrate the scales, and start treating the temporary COVID boost as a transient development.
In some ways, the sharp stock-price correction couldn't have come at a better time. Netflix has only started to produce consistently positive free cash flow and to pay back some debt instead of borrowing more money. The stock is now changing hands at value-minded ratios such as 20 times trailing earnings and 3.3 times sales. This is unfamiliar territory for us Netflix investors, who are used to shares being valued at nosebleed-inducing ratios:
I think Netflix will get right back to stellar user growth in the second half of 2022. The cable-TV and movie-theater industries are still holding on to most of the viewing hours of the average consumer. Many parts of the world are just getting widespread access to decent broadband connections and reliable online payment services -- two prerequisites for Netflix's business prospects in developing nations.
Putting it all together, Netflix looks like a no-brainer buy at these multiyear lows. This is still a high-octane growth story, pumping the brakes slightly after a temporary burst of unsustainable acceleration.