After Netflix (NASDAQ: NFLX) released its results last week, its share price plunged. It is now at levels not seen since mid-2020, when it had just started inching up as we went into lockdowns. As a potential investor in the stock, I can either see the decline as a buying opportunity or a reason to stay away. The big question for me is, which one is it?
Netflix’s stellar 2021
To answer it, I first tried to figure out why the stock fell so drastically in the first place. The streaming service starts out the earnings release by talking about its achievements in 2021. These include producing the biggest TV show of the year, which is (surprisingly for me as a viewer) Squid Game. It also produced two of its biggest films, Red Notice and Don’t Look Up. It also says it is the most Emmy-winning TV network and the most Oscar-nominated film studio in 2021.
The list of Netflix glory does not end there. In the final quarter of 2021, the company’s revenues grew by 16% on a year-on-year basis, just a little below the 19% growth for the year as a whole. It also grew its profits in the final quarter. The number of paid memberships has also continued to rise, reflecting its continued popularity. It is also optimistic about its long-term prospects, “even in a world of uncertainty and increasing competition” it says.
What’s wrong with the earnings update?
So what is the problem? It’s near-term outlook, that’s what. Its revenues are expected to continue growing, but the rate of growth is consistently slowing down. In the first quarter of 2022, it is expected to slow down to 10.3%, almost half the growth seen in 2021. Significantly, its earnings are actually expected to decline next quarter compared to the corresponding quarter of 2021.
It is not hard to see why, really. There is a lot more competition in the streaming space. Post-lockdowns, there might just be far less time spent watching streaming services. I know from my own experience, that my recent Netflix watches have been restricted to a sporadic episode or two of Parks and Recreation. There is just so much more competing for time and attention now. The appreciation in the US dollar is also expected to impact its revenue by $1bn in the next year, since the company also has a big market outside the US. This, I imagine would also affect its earnings.
Would I buy the stock?
Despite the fact that the winds seem to have turned against the Netflix stock, I don’t think it is a write-off. In fact, I think the stock looks far more attractive to me now after its share price fall. I do think that more stock price correction might be coming, before it rises more. I would ideally buy it then. For now I am observing its share price movements but am quite likely to buy the stock this year, especially when I consider its long-term share price trend.
