Netflix (NASDAQ: NFLX) shares had a bad day on Friday, falling 22%. The share price fall was the result of lower-than-projected subscriber additions for the final quarter of 2021, and a weaker-than-expected forecast for the first quarter of 2022.
After Friday’s fall, Netflix stock is now down about 30% over the last year. That’s a big pullback. Is this a great buying opportunity for me? Let’s take a look.
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Netflix: is the growth story still intact?
As a long-term investor, I don’t get too hung up on quarter-to-quarter growth figures and whether they meet Wall Street’s estimates. So, I’m not too fussed that subscriber additions for Q4 came in at 8.3m versus the forecast of 8.5m. I’m more interested in the long-term growth story here. Is it still intact?
Looking at Netflix’s Q4 results, the answer is yes, in my view. For the year, revenue came in at $29.7bn, up 19% on 2020. Meanwhile, management was relatively confident about the future. “We’re optimistic about our long-term growth prospects as streaming supplants linear entertainment around the world.” It’s worth noting that analysts currently expect revenue to hit $34.1bn in 2022. That would represent growth of 15%.
As a ‘quality’ investor, I also pay attention to profitability. And the numbers here were quite encouraging, to my mind. For 2021, operating income jumped 35% year over year to $6.2bn while net income rose from $2.7bn to $5.1bn. Operating margin rose from 18% to 20%. For 2022, the company expects the operating margin to be between 19% and 20%.
Of course, I also pay attention to the valuation. Is there value on offer here? Well, at present, analysts expect Netflix to generate earnings per share of $13.1 for 2022. This means that at the current share price, the forward-looking P/E ratio is about 30. That’s a relatively attractive valuation, in my opinion. Go back a few years, and Netflix was trading with a P/E ratio in the 70s.
Putting this all together, I can see some investment appeal at the current share price.
2 major risks to consider
Having said that, I do have a couple of concerns in relation to Netflix stock.
One is the lack of economic moat. Competition in the streaming space is really heating up now. Rivals include Amazon Prime, Apple TV+, Disney, Hayu, Britbox, NOW TV, and YouTube. The issue here is that customers can easily switch to a competitor. So, Netflix doesn’t have the same kind of moat that the other Big Tech companies have.
Another concern is the business model. Ultimately, Netflix needs to spend a ton of money to keep producing great shows. This is illustrated by its cost of revenue, which has surged from around $10bn in 2018 to $17.3bn in 2021. It will need to keep spending if it wants to retain its user base. I prefer YouTube’s content model where users create their own content and YouTube pays them a fee depending on hits.
Netflix stock: my move now
Given the risks here, I’m going to leave Netflix stock on my watchlist for now. I do think the stock offers some value after the recent share price pullback.
However, all things considered, I think there are better growth stocks to buy right now.