Netflix: Down over 30% This Year; Now What?

Netflix (NFLX) has experienced an incredible run over the past decade, significantly outperforming the market. However, after recently reporting its fourth-quarter financials, the stock has been tumbling and has lost more than 30% of its value in 2022. Regardless, I am bullish on the stock.

This happened primarily because of management’s disappointing guidance of only 2.3 million subscriber additions for 2022, which was a lot lower than what the market had expected.

However, the market still believes the long-term potential of the Netflix stock is intact, and its recent entry into the gaming sector can help it in catalyzing its subscriber growth.

Netflix’s streaming platform offers a wide range of films and television series worldwide either through distribution deals or through its own productions, known as Netflix Originals. Netflix’s services can be availed from anywhere across the world except for regions such as Mainland China (due to local restrictions), Iran, Syria, North Korea, and Crimea (due to U.S. sanctions).

Netflix is a dominant player in the entertainment segment. It is the second-largest entertainment/media company as per market capitalization and is ranked 115th on the Fortune 500. Unsatisfactory results coupled with inflation and monetary uncertainty have taken a toll on the company’s valuation.

Netflix intends to recreate the market-disrupting ability that its streaming services used to have when it was introduced back in 2007 by investing more into high-quality content and making unique strategic decisions like venturing into the gaming industry. All these decisions might have a positive influence on the company’s valuation but will need time.

Jeffrey Wlodarczak from Pivotal Research feels quite the same. He has lowered the firm’s price target to $550 from $750 but has kept a Buy rating on its shares. He believes the pandemic has pulled forward massive amounts of demand for numerous players, including Netflix, and across the board, it is taking longer than expected for gross subscribers to normalize.

Moreover, he does not view the 2022 decline in operating margins as an issue as it mostly reflects the effects of the strong dollar.

A Saturated Market with Increased Competition

Previously, Netflix was the only dominant force in the video streaming market. It was able to grow its user base rapidly during that time due to such a lack of competitive forces. However, now the tables have turned for the company as a vast number of streaming options such as Amazon Prime Video, Walt Disney’s (DIS) Disney+, and AT&T’s (T) HBO Max have sprung up. 

Netflix can earn higher revenue either by attracting more subscribers or by raising its subscription prices. The company has tried to occasionally raise its price, but this strategy is not suitable for such a highly competitive market the company is surviving in. So, it is spending billions of dollars each year to produce high-quality content to bring in more subscribers and keep existing ones engaged.

Despite that, in the U.S. and Canada markets, Netflix has added only 1.3 million net new subscribers. Moreover, in international markets, its growth isn’t a sure thing. Like in India, it is trying to catch up with Amazon Prime Video and Disney’s Hotstar and has even tried to slash prices in South Asian nations in an effort to attract more viewers.

Depressing Financials

Netflix had maintained a pretty good balance sheet, but its recent financials show the company is slowing down. The company’s global paid streaming memberships grew by only ~9% year-over-year, and it added 8.3 million global paid net subscribers during the quarter. Its revenue came at $7.71 billion, indicating a 16% year-over-year growth with a 7% year-over-year increase in average revenue per membership (ARM).

Also, the operating margin decreased by 6.2%, and earnings per share came at $1.33 compared to $1.19 recorded a year ago. Moreover, Netflix had again reported a negative free cash flow amounting to $569 million for the third consecutive time.

Wall Street’s Take

Turning to Wall Street, NFLX stock comes in as a Moderate Buy. 18 out of 36 analysts have given Netflix a Buy rating, whereas another 15 have suggested a Hold on its shares. The remaining three analysts, however, have suggested a Sell.

The average Netflix price target is $521.21, which implies a healthy 30% upside on the stock.

Dive Into the Booming Gaming Market 

The gaming market has huge potential. This market was valued at $203.12 billion in 2020 and is expected to reach $545.98 billion by 2028 growing at a CAGR of 13.2%. Netflix sees gaming as a competitor to the company’s products and therefore has decided to enter the gaming market through its interactive designs.

In November 2021, the company released five mobile games accessible to all its subscribers, and now just within a few months, the number has crossed a dozen. The best part is it has targeted the mobile gaming segment, which is the largest revenue segment of the gaming industry. Besides, in the coming days, it might even change its current no in-game monetization policy to monetize the potential earnings from this business segment.

After Disney and Warner Bros, it is Netflix that spends the maximum on its content. Despite that, it is facing a huge crisis in its subscriber growth. The company, therefore, feels by rolling out games with a flat subscription rate, it will be able to deliver gaming as an added value product to its customers. Netflix games have already surpassed over 8 million downloads, but the company would still require a lot more time to revitalize its subscriber growth.

Conclusion

Netflix lately did have a few rough months, but the stock has never lacked potential. 2022 might not be the best year for the company; however, this year will set the foundation for its future direction. So, investors should not miss the opportunity to consider this stock in the dip before it starts rallying once again.

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