The stock market sell-off of 2022 has created some real opportunities to find undervalued stocks. Down by 70% off its high, Netflix (NFLX 0.91%) stock is relatively cheap by historical standards. The streaming pioneer thrived at the pandemic's onset, but it is now grappling with the reversal of stay-at-home trends as well as other factors.
In its last earnings report, Netflix said it experienced subscriber losses for the first time in 10 years. but there was a lot more in that report and there is a lot more to Netflix as a company which strongly suggests that the market overreacted to the news.
Let's take a look at why investors should buy this undervalued stock now before everyone else does.
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Several factors leading to subscriber losses at Netflix
Netflix management said the company shed 200,000 subscribers in its most recent quarter, which ended on March 31. Management highlighted several factors, including account sharing, the Russian invasion of Ukraine, and competition as likely causes for the decline. It also said that things will worsen before they get better and forecast a subscriber loss of 2 million in the ongoing second quarter.
Various estimates put the number of households that should be paying for a subscription but access the streaming service through a shared account at about 100 million. The company has known about account sharing for a while but has opted to not crack down on the issue in any significant way until now. In the conference call that followed the earnings release, management specifically noted it will be going after non-subscribing users more aggressively.
NASDAQ: NFLX
Key Data Points
In response to the Russian invasion of Ukraine, Netflix shut off service to its Russian subscribers. The decision cost Netflix 700,000 paying members. That means that without the self-inflicted wound, Netflix would have added 500,000 subs in the first quarter. This action was understandable as a sign of solidarity with Ukraine and it was something many businesses have done. Its overall effect on the bottom line is likely minimal.
The biggest factor affecting Netflix lately was likely increased competition. Other tech and media companies are catching on to the popularity of streaming services and introducing their own products or ramping up spending on already existing services. Film studios emphasized their streaming services and invested in their growth and this rise in competition (often at a lower price) made it difficult for Netflix to keep subscribers looking for alternatives.
Netflix's scale is a competitive advantage
Still, Netflix is the streaming industry leader with 222 million accounts. People have emphatically stated, through their spending, that they prefer to stream content versus watching through a cable connection. This trend is unlikely to reverse, as streaming is always more convenient and often less expensive than cable TV.
It can be reasonably assumed that Netflix will convert some portion of those 100 million unauthorized account sharers into paying customers. Those are folks who have a proven appreciation for the Netflix service.
And while the competition should not be ignored, it is not likely to be as fierce as it is now. Many of these services launched at introductory prices, causing losses for their owners that are unsustainable. Meanwhile, Netflix reached a scale in 2021 to generate $29.7 billion in revenue and $5.1 billion in profits last year.
NFLX Revenue (Annual) data by YCharts
Eventually, competing services will need to raise their prices, eliminating a strong incentive for folks to choose them over Netflix. Moreover, the newness of these services attracted folks who wanted to try it out to see what content was available on those platforms. Few streaming services can compete with Netflix as far as breadth and depth of content.
Netflix's stock is undervalued
NFLX PE Ratio data by YCharts
Finally, when measured by its price-to-sales ratio of 3 and price-to-earnings ratio of 18.6, Netflix is historically undervalued. Investors have not had an opportunity to buy the stock this cheap since before 2014. It would be good to buy Netflix stock now before everyone else does.
