Is The Show Over for Netflix?

HIOne company that has benefited greatly from stay-at-home orders and the world that has been shut down during the early phases of the pandemic is streaming giant Netflix NFLX.

Once widely lauded and an investor favorite across many portfolios, the tide has changed significantly for the company throughout 2022.

The chart below shows how Netflix’s stock has performed over the past five years when blending the S&P 500 for comparison.

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Image Source: Zacks Investasi Investment Research

As you can see, Netflix was once a stellar investment that was no doubt a staple in many portfolios. Beginning at the end of 2021, the stock took a sharp dip, fell and lost enormous amounts of value.

Below is a chart of Netflix stock from year to year.

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Image Source: Zacks Investasi Investment Research

One word perfectly describes that graph – destruction. So, what exactly is causing this spiral? Is the company still worth your hard-earned money? Let’s see.

Increased Competition

Online streaming services have sprung up left and right over the last few years, no doubt an important part of the “digital shift” we have been through.

Some of these streaming services include Amazon AMZN Prime Video, Apple AAPL TV, Roku ROKU, and Disney+ DIS. All of these services have pushed boundaries, making the industry much more competitive. Simply put, Netflix is ​​no longer the inbound streaming service it used to be.

For example, Netflix used to stream some blockbuster Marvel movies, like Infinity War and Thor: Ragnarok. Since Disney+ came into existence, the NFLX has lost access to these beloved films, no doubt causing a shift in sentiment. This is just one example of a company losing out to its competitors.

In addition, coming to Disney’s latest quarterly report, many believe that since the NFLX lost customers throughout the quarter, Disney should have too.

This turned out to be a significant misunderstanding, as Disney boasted an even stronger net subscriber base for the quarter, capturing 7.9 million subscribers vs. the expected 4.5 million. In addition, Disney+ remains on track to reach the guideline of 230 – 260 million paying subscribers by the end of FY24, which will overtake NFLX in total subscribers.

Slowdown in Customer Growth

Of course, subscriber count is king for the streaming giant. The unfortunate news is that things have recently taken a turn for the worst in this area.

In Q4 2021, the company provided disappointing guidance that it expects to add 2.5 million new subscribers in Q1 2022, well below the consensus expected seven million.

Fast forward to 2022 Q1, and the company reports that it has lost more than 200,000 customers in the quarter; The NFLX then gave another disappointing guide that it expects another two million subscriber drop for the coming quarter.

The disappointing guidance set the fuel on fire, with NFLX shares plunging 35% after the Q1 2022 earnings report. Simply put, the market is pricing in slowing growth, and the stock’s downward trajectory continues.

Current Rating & Forecast

However, not everything is negative. After the sell-off, Netflix now has a much more reasonable valuation rate – a positive for potential investors. A 12-month P/E ratio of 15.6X is an absolute fraction of the 2018 high of 161.8X and nowhere near the five-year median of 61.1X.

The NFLX currently has a B Score Style Value.

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Image Source: Zacks Investasi Investment Research

Analysts have rolled back their earnings forecasts across the board over the last 60 days, with a revised 100% deal percentage. The $2.95 EPS forecast for the coming quarter reflects a marginal 0.7% drop in revenue from the year-ago quarter. Moreover, FY22 earnings are expected to fall by almost 3% but are expected to rise 10% in FY23.

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Image Source: Zacks Investasi Investment Research

The top-line forecast looks solid, with estimated $32.5 billion in revenue for FY22 showing a striking 9% year-over-year increase. Further, in FY23, revenue is expected to rise an additional 9.1% to $35.4 billion.

Netflix Solution

The company has turned to a solution to turn things around – advertising. As of now, NFLX doesn’t run any ads in its streaming service, and that’s one of the big reasons why the streaming giant has become so popular.

After all, no one likes advertisements in the middle of their favorite shows and movies.

In a quick turn of events, Netflix has opened up and has plans for an ad-based tier within its streaming service. It’s important to note that the ad-based tier will cost less and is something that feels inevitable from the start.

Consumers are increasingly frustrated with the constant price increases that the NFLX has implemented, and this will no doubt alleviate that problem. Previously, the NFLX primarily used its pricing power to increase revenue, something many would call a double-edged sword – Netflix made more money from higher subscription fees but also risked losing subscribers who refused to pay more.

The main thing is

Overall, it’s been a very tough stretch for the once-loved stock. Known for making big profits, the story quickly turned south in 2022.

Currently, Netflix’s grading rate is much more reasonable, and the ad-based tier will no doubt help push the top line. In the near term, I think investors should keep their distance from these stocks but also keep an eye on the quarterly results.

If subscribers start to pile back up, that means a game for Netflix. At this point, however, it appears to be a losing battle, further featured by Zacks Rank #4 (Sell).

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report

Apple Inc. (AAPL): Free Stock Analysis Report

Netflix, Inc. (NFLX): Free Stock Analysis Report

The Walt Disney Company (DIS): Free Stock Analysis Report

Roku, Inc. (ROKU): Free Stock Analysis Report

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The views and opinions expressed herein are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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