Netflix : Sinking Ship Or Prime Opportunity? (NASDAQ:NFLX)

As of today, Netflix is down almost 70% from it’s all-time high.

Despite having significant investor interest, it seems like even the FAANGs are not impervious to such crashes. 

For those unaware, the Q1 2022 report highlighted the drop in subscriber numbers for multiple regions which likely let to the stock price free-falling.

Is it time to enter this counter? Netflix is after-all, still a streaming behemoth with major market share. While it’s growth has somewhat slowed, it still has moats, and substantial operating margin.

Business Model

Netflix is no stranger to Singaporeans. It’s a global streaming service that offers a wide variety of award-winning TV programmes, films, anime, documentaries, and most recently, games.

It’s content can be accessed through nearly any internet-connected device. These include smart TVs, smartphones, and tablets, to name a few.

Titles can also be downloaded for viewing later as well. Higher price plans (they have three price plans) even allow the option of HD and UHD viewing, on multiple devices.

While roughly half of it’s content is acquired through distribution deals, it also produces titles under its own name, known as Netflix Originals. These include well-known names such as Squid Game, Money Heist, and Kingdom.

In return, it’s subscribers pay monthly membership fees to Netflix. These fees make up the vast majority of it’s revenue. 

Netflix has also been increasing prices for it’s various subscription plans. This has happened at regular intervals over the years. Speed of price increases are managed so as to attain a step-up in revenue, while trying to retain as much customers as possible.

In US dollars

Performance Metrics

With subscriber volumes being a key performance metric of it’s business model, we’ve laid out it’s numbers below. 

This growth in it’s subscriber base has also boosted Netflix’s revenue and operating margin.

Bad news for investors in it’s recent quarterly report though. The main issues being the drop in subscriptions across multiple regions, and a largely negative forecast for Q2 2022.

While part of the decrease is due to it’s decision to pull out of Russia due to the war, that’s not the only issue.

In it’s Q2 2022 forecast, management still expects a negative reversion of 2 million subscibers.

A company’s stock price generally reflects the expected future growth and out-performance of a particular company. This episode might be interpreted by many as a inflection point for the streaming giant’s growth, causing it to lose it’s “growth premium”. 

Headwinds

The company has mentioned a few reasons for the slowdown in member acquisitions globally; 

It’s customer acquisition speed has caught up with the market.

  • Netflix’s growth is partly dependent on factors which are out of their control. These include the adoption of On-demand entertainment, and data costs.
  • Over time, they do expect these factors to improve gradually, opening up more potential customers.

Freeloaders.

  • Apart from the 222 million households subscribed to it’s streaming plans, the company also estimates that the passwords to those accounts are also being shared with another 100 million plus households, who do not pay any fees.
  • This is due to Netflix allowing an unlimited number of devices to log into accounts, with the only deterrent being simultaneous streaming.

Competition is heating up.

  • Netflix isn’t the only company in the streaming industry. Other players such as Youtube, Hulu, and Amazon Prime, are also working to grow their market share.

Macro factors.

  • Other factors such as sluggish economic growth, increasing inflation, geopolitical events, and COVID are likely having an impact as well.

The Response

Initiatives to counter these headwinds include;

Doubling down on Content creation and the Netflix platform.

  • Working with partnerships to create wildly popular content and titles.
  • Improving aspects of the Netflix platform, such as recommendations and product features.
  • Inclusion of games on it’s platform for value-add.

Monetize sharing for the 100 million households that do so.

  • Testing out paid sharing features, which allow subscribers to pay a small fee to include additional households using their account.
  • Trying out lower-cost, advertisement-supported channels (Netflix channels do not feature ads at the moment).

Looking outside the US for growth. And content as well.

  • Continue to build on growing subscription rates in countries outside the US. And also look to produce more regional blockbusters.

What We Think

Netflix currently trades at a P/S ratio of 3.3 times, with a P/E ratio of 18.9 times. Subjective, but i think it’s kind of a middle-ground between growth and value stocks.

This could be a potential transition period for the stock, where it enters the “value” side. And the macro environment of rising interest rates and bearishness doesn’t help at all.

It’s also important to note that Netflix’s market cap stands at US$99.18 billion. Pretty gigantic. The risk-to-reward ratio doesn’t really bite for me at this price.

If you still do decide to enter this counter, we hope you’ve a high conviction, and have your game plan figured out.

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