Investing in FAANG stocks? Is this the right time? Out of the FAANG companies, Netflix has taken the most beating in the stock market in 2022 as reports indicate that the stock has plunged 70% in the first quarter of 2022. For the first time, Netflix has lost customers in the streaming era, and several investors are considering exiting.
However, the revenues have almost tripled (given in the graphs later on) in the last five years, and in the first quarter of 2022, still earned $1.2 billion or $3.20 earning per share, which translates to a 6% increase compared to last year! But does this slow subscriber growth mean you should not invest in Netflix for the long haul? Let’s take a closer look.
How has Netflix performed in the past?
Before we come to the present and venture an opinion on the future, it is worthwhile to take a peep into the past and look at the Netflix stock case study.
In the two decades since its IPO launch, Netflix had achieved a market capitalisation of upwards of $100 billion. The annual revenue for the fiscal year 2021 stood at ~$30 billion, which was an almost 19% YoY growth over the preceding year.
The post-pandemic era of global lockdowns and social restrictions have also contributed heavily to the OTT industry boom on the whole, including Netflix. Data shows that both Netflix revenue and EBITDA have tripled in the 5-year period from 2017-2021.
source: Google Finance
Additionally, the EBITDA has grown to 6.4 billion as compared to ~911 million in 2017. The net profit margin has increased four folds to 17.23, which is up 55.93% compared to the number in 2020. Not to forget, the EPS (indicating profitability, higher the EPS the better) has grown 10 times in the last 5 years.
What are the reasons for the downward trend?
Netflix has lost almost a million subscribers in the recent past for the first time in its history. The poor recent performance of the Netflix stock can be attributed to a combination of factors.
The OTT space has become crowded with a lot of international and local players active in the segment. Not only that, but regional players in Asian markets have also led to a noticeable decrease in the existing subscriber base.
Among other reasons, the US is witnessing an unparalleled rise in inflation. Amid steeply rising prices, a high consumer index and the strains of unemployment, indulgences like OTT subscriptions have taken a back seat.
Another cause for the drop in the subscriber base of Netflix can be linked to the ongoing Russia-Ukraine conflict. The ongoing sanctions on Russia by the US and other western nations have led Netflix to suspend its streaming service in the country, which had many paid subscribers.
This is understandable but unlikely to last long. With the re-emergence of pre-pandemic economic levels and steady resurgence of global purchasing power, financial experts see an upwards trend in this direction. You should ask yourself whether the concerns on declining subscriber growth are yet to be fully priced in, or is Netflix a great buy at these multiyear lows?
In the 5-year period from 2017-2021, when Netflix tripled its revenue, the median P/E ratio (price you need to pay to get $1 of the company’s earnings) was 92. This is currently hovering around 20. Even the most optimistic financial expert doesn’t expect this to rise dramatically overnight; however, there is plenty of scope for the stock to grow and deliver high returns.
Reports put the estimated median price for the coming 12 months at over 50% of the stock’s current trading price, while some predict a more drastic gain within the same period.
What are the contributors to the resurgence?
Netflix has been making earnest efforts to resurrect its OTT leadership globally. Some of the evident key initiatives include a strong focus on developing original content for movies and web series.
Today, Netflix has already become reputed enough to give large traditional movie studios a run for their money. Attention is also being paid to regional content, which is considered by many a big driver for any OTT platform. Asia, for example, is easily the largest untapped market in terms of potential subscriber base.
Netflix realizes this and is channelling efforts towards making culturally appropriate content targeted towards the geographically disparate audience here and in other parts of the globe. To drive deeper penetration in the market, Netflix has partnered with various telecom and internet service providers.
Another important initiative being considered by the Netflix management to offset the declining revenue per user is to supplement its pure-play subscription-based model with an advertising-based tier system. While the specifics of this are yet to be released, it is clear that Netflix is strongly focused on engaging its customers and monetising its present platform, which is largely renowned for its advertisement-free streaming content.
Why Netflix Warrants A Buy-And-Hold Approach At Current Levels?
So, with all this information at your disposal, we come back to the question we started with – Is it a good time to invest in Netflix?
Analysing the stock of Netflix, in the first quarter of 2022, Netflix earned $3.53 a share on a sale of $7.87 billion, while Wall Street had expected $2.90 a share out of $7.93 billion in sales. Though the year-on-year earnings fell 6%, the sales reported a 10% climb.
The Wall Street Journal reported that Netflix will shift its focus to profitability and will curb its extravagant spending. This means it will focus on quality content and be more selective in choosing the content it wants to produce, which could spell a bad sign for producers. It will also focus on increasing revenue by adopting the ad-based model on its platform, similar to what other OTTs are currently doing. Adding on, it is also looking to monetise the account sharing on the service.
All these strategies will not work their magic overnight, indicating that subscribers’ current bruise is only temporary. The company is also focused on increasing its subscriber base, which will happen only in the long term.
What are the different ways to invest in Netflix stock?
The financial results of Q4 in 2021 show that Netflix made a revenue of $30 billion which was a 19% growth year-on-year. Here’s how you can invest in Netflix.
- Invest directly in Netflix shares – The Netflix stock is not available in Indian markets, but by opening a trading account with Stockal, you can directly get access to the US stock market and trade shares of not only Netflix but also other companies registered on the market as well
- Investing in ETFs – If you’re someone who’s unfamiliar with direct investing or do not have the time to monitor the stock every day, then you can consider investing in ETFs or Exchange Traded funds that have holdings in Netflix. ETFs are a group of various equities and bonds that trade as a single fund. They are comparatively more affordable than stocks.
- Use Stacks – Stacks comprise several US stocks and ETFs bundled together. Instead of investing in each stock or ETF individually, you can take advantage of investing in stacks that have exposure to Netflix stocks.
- Investing through mutual funds – similar to ETFs, mutual funds are also a collection of securities, equities and bonds of various asset classes. You can choose to invest in a fund that has exposure to Netflix stocks, although very limited.
Summing up, is Netflix a good stock to buy?
This is the first time investors have focused on a drop in subscribers in over a decade. This only indicates that the transition from subscriber growth to profitability was an inevitable pain that was due to come. Today, Netflix is not the fast-growing, video-on-demand company that it was, but this isn’t the end of the company but rather a chapter in the long story that needs its page to be turned.