Is the Netflix show over? – June 23, 2022

One company that benefited greatly from lockdown orders and a world that was shut down in the early stages of the pandemic was the almighty streaming giant Netflix (NFLKS free report).

Once widely hailed and loved by investors across many portfolios, things have changed significantly for the company over the course of 2022.

The chart below shows the performance of Netflix shares over the past five years, as well as the S&P 500 for comparison.

Zacks Investment Research
Image Source: Zacks Investment Research

As you can see, Netflix was once a stellar investment that was undoubtedly the staple of many portfolios. Since the end of 2021, stocks have gone on a steep downward trajectory, falling sharply and losing a huge amount of value.

Below is a chart of Netflix shares since the beginning of the year.

Zacks Investment Research
Image Source: Zacks Investment Research

One word perfectly describes this diagram – collapse. So what exactly caused this spiral? Is the company worth your hard-earned money? Let’s take a look.

Growing competition

Over the past few years, online streaming services have popped up here and there, which is no doubt a big part of the “digital shift” we’ve been through.

Some of these streaming services include Amazon (AMZN Free report) Prime Video, Apple (AAPL Free report) TV, Roku (ROCU Free report) and Disney+ (DIS free report). All of these services push the boundaries, making the industry much more competitive. Simply put, Netflix is ​​no longer the streaming service it used to be.

For example, Netflix used to stream several Marvel blockbusters such as Infinity War as well as Thor: Ragnarok. Ever since Disney+ came on the scene, the NFLX has lost access to these beloved movies, which has no doubt caused a change in sentiment. This is just one example of how a company is inferior to its competitors.

Also, based on Disney’s latest quarterly report, many believed that since the NFLX lost subscribers during the quarter, Disney should have subscribers too.

This turned out to be a serious misconception as Disney boasted of a strong increase in subscribers for the quarter, reaching 7.9 million subscribers versus an expected 4.5 million. In addition, by the end of fiscal year 24, Disney+ is still aiming to reach its target of 230-260 million paying subscribers, surpassing the NFLX in total subscribers.

Subscriber growth slowdown

Of course, the number of subscribers is a key factor for the streaming giant. The sad news is that in recent years things in this area have deteriorated sharply.

In the fourth quarter of 2021, the company released disappointing forecasts of a 2.5 million increase in new subscribers in the first quarter of 2022, well below the consensus forecast of seven million.

Fast forward to the first quarter of 2022 and the company reported that it lost over 200,000 subscribers in the quarter; Then the NFLX again gave a disheartening forecast that another two million drop in subscribers is expected in the coming quarter.

The disappointing outlook added fuel to the fire, with NFLX shares falling 35% after the 2022 first quarter earnings report. Simply put, the market appreciated the slowdown in growth, and the downward trajectory along which the shares moved continued.

Current assessment and forecasts

However, not everything is negative. After the sell-off, Netflix is ​​now showing much more reasonable valuation levels, which is a big plus for potential investors. Its forward 12-month P/E ratio of 15.6X is an absolute fraction of its 2018 high of 161.8X and far from its five-year median of 61.1X.

The NFLX currently has a B value style rating.

Zacks Investment Research
Image Source: Zacks Investment Research

Analysts have cut their earnings estimates across the board over the last 60 days, with 100% agreement with the revision. An EPS estimate of $2.95 for the forthcoming quarter reflects a marginal 0.7% drop in earnings from the year-ago quarter. In addition, FY22 earnings are expected to decline by nearly 3% but are projected to rise by 10% in FY23.

Zacks Investment Research
Image Source: Zacks Investment Research

The revenue projections seem strong, with FY22 revenue estimates of $32.5 billion showing a notable 9% year-over-year increase. In addition, FY23 revenue is expected to grow another 9.1% to $35.4 billion.

Netflix Solutions

The company turned to a solution to change the situation – to advertising. As of now, NFLX does not advertise on its streaming services, which is one of the main reasons why the streaming giant has become so popular.

After all, no one likes ads in the middle of their favorite shows and movies.

All of a sudden, Netflix has opened up and plans to create an ad layer on its streaming service. It is important to note that the ad tier will be cheaper, and from the very beginning it seemed inevitable.

Consumers are becoming increasingly frustrated with the constant price increases that the NFLX is pushing, and this will no doubt solve this problem. In the past, NFLX has mainly used its pricing policy to boost revenue in what many would call a double-edged sword: Netflix makes more money from higher subscription costs, but also risks losing subscribers who refuse to pay more.

bottom line

In general, it was a very difficult period for the once beloved action. This story, known for its huge profits, quickly went awry in 2022.

Netflix’s valuation tiers are much more reasonable these days, and an ad-based tier will surely help boost revenue. In the short term, I think investors should stay away from these stocks, but also keep an eye on quarterly results.

If subscribers start accumulating again, the game is on for Netflix. However, at the moment it looks like a losing battle, as evidenced by his Zacks Rank #4 (Sell).

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