Why did Netflix stock drop in January and where does it go from here? (NASDAQ:NFLX)

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I continue to rate the shares of Netflix, Inc. (NFLX) as a hold. I discussed NFLX’s 2022 outlook in my previous post on January 12, 2022. I focus my attention on Netflix’s recent stock price decline in this latest update.

I think Netflix’s stock price decline in January comes as no surprise given its lower-than-expected Q1 2022 management forecast. After reviewing the company’s valuations and financial outlook, I consider Netflix shares to be deserving of a hold rating and expect the company’s shares to move sideways in the near term.

Why did Netflix shares fall in January?

Year-to-date 2022, Netflix shares have fallen -35.1%. Over the same period, the S&P 500 fell a modest -7.2%. The bulk of NFLX’s share price correction occurred in January 2022, where the company’s share price fell -28.5% from the -5.8 decline % of the S&P 500 the previous month.

Netflix stock price performance since the start of 2022

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NFLX stock price performance in January 2022

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There are two main reasons for the substantial drop in Netflix stock price in January.

First, NFLX indicated in the company’s fourth quarter 2021 shareholder letter issued on January 20, 2022 that it expects to achieve subscriber net additions of 2.5 million in the first quarter of 2022, which was very disappointing.

Netflix’s actual net subscriber additions for the fourth quarter of 2021 were 8.3 million, which was lower than the company’s earlier forecast of 8.5 million. NFLX’s Q1 2020 subscriber net additions of 4.0 million were also better than the company’s Q1 2022 guidance.

Additionally, Netflix’s expected Q1 2022 subscriber net additions of 2.5 million were significantly below Wall Street analysts’ consensus estimate of 5.9 million, according to S&P Capital IQ data prior to the publication of recent management guidelines.

Second, Netflix’s Q1 2022 revenue and operating margin forecasts were below market expectations.

As noted in its recent quarterly letter to shareholders, NFLX expects to grow revenue by +10.3% year-on-year to $7,903 million in the first quarter of this year, and to assist to a contraction in its operating profit margin from 27.4% in the first quarter of 2021 to 22.3% in the first quarter of 2022. In contrast, sell-side analysts initially expected Netflix to generate better sales of 8 .1 billion and posted a higher operating profit margin of 25.0% in the first quarter of 2022, according to S&P Capital IQ The data.

Along with weaker-than-expected subscriber growth, the stronger US dollar also had a major impact on Netflix’s lower-than-expected revenue and profitability forecast for the first quarter of this year.

Netflix pointed out in its Q4 2021 earnings call on January 20, 2022 that it would have achieved relatively higher revenue growth of +14% at constant currency. The company also mentioned in its fourth quarter letter to shareholders that the stronger-than-expected U.S. dollar is expected to have a “two percentage point negative impact on our 2022 operating margin” as it generates “60% of our revenue outside of the US.”

In summary, NFLX’s management guidance for the first quarter of 2022 disappointed the market, justifying the company’s significant share price drop in January 2022.

Is NFLX stock undervalued?

Given Netflix’s poor stock price performance on an absolute and relative basis at the start of 2022, it’s worth doing an assessment of NFLX’s current valuations to see if its stock is undervalued.

Netflix is ​​currently trading at consensus on the next twelve months enterprise value-to-income ratio and normalized P/E multiples of 5.6x and 35.1x, respectively, according to S&P Capital IQ The data. Current stock valuations are below historical averages. The average future multiples of enterprise value to revenue over three years and five years for NFLX were 7.7 times and 7.5 times, respectively. Similarly, Netflix shows much higher three- and five-year average term normalized P/E multiples of 62.5x and 80.4x, respectively.

However, Netflix’s downgrade is largely justified by the company’s more modest growth expectations over the next two years. According to S&P Capital IQ data, NFLX was able to grow revenue by at least +20% every year between FY2013 and FY2020. But Netflix’s revenue expansion slowed to +18.8% during of fiscal 2021, and the company is expected to grow revenue by a relatively lower CAGR of +11.2% for the period of fiscal 2022-2026 based on the sell-side consensus forecast.

In conclusion, I am of the opinion that Netflix is ​​properly valued, as its current valuation multiples are fair given its prospects for future revenue growth.

Key NFLX Stock Metrics

Investors largely focused on Netflix’s management direction for the first quarter of 2022 when the company released its fourth quarter 2021 and full year 2021 results in late January 2022. Specifically, subscriber net additions of NFLX by geographical region are the main parameters of the title to pay attention to.

According to the company’s Fiscal 2021 10-K filing, Netflix’s net subscriber additions for Europe, Middle East and Africa (EMEA), Asia-Pacific or APAC, Latin America (LATAM) and United States United States and Canada (UCAN) in 2021 were 7,338,000, 7,140,000, 2,424,000 and 1,279,000, respectively.

Three key insights can be gleaned from evaluating Netflix subscriber statistics for different geographic regions.

First, the EMEA and APAC regions are the main drivers of new subscriber growth for NFLX. Notably, Netflix slashed its subscription prices in India, a key Asian market, in December 2021, suggesting that the company is very keen to maintain its subscriber growth momentum in developing and emerging markets.

Second, price increases have a negative impact on new subscriber signups or retention of existing subscribers. For example, Netflix announced a subscription price increase for Brazil in July 2021, and subscriber net additions for the LATAM region slowed from around 1.21 million in Q4 2020 to 0.97 million. in the fourth quarter of 2021, which also held back 2021. subscriber additions.

Third, the UCAN region is now a very mature market, as evidenced by the modest net subscriber additions in 2021. As a result, Netflix shifted its focus from adding new subscribers to monetizing the existing subscription base in this region, and this is evident with NFLX’s decision to increase subscription prices for the United States and Canada, as announced in January 2022.

In the following section, I discuss the short-term outlook for Netflix’s stock price, given the differences in subscriber additions for different geographies.

Where is Netflix Stock going?

I see Netflix’s stock price moving sideways in the short term, as I have a mixed view of the company’s prospects in 2022.

In my previous article for NFLX published on January 12, 2022, I was positive about “Netflix’s strong 2022 content slate” that “could help the company reduce churn and retain subscribers.” At the same time, I was concerned about “a growing number of consumers experiencing subscription fatigue”, especially in mature markets, and the need to “accept lower ARPU” to drive expansion on “international and emerging markets in the future”. My opinions are unchanged from my previous article.

In its fourth quarter 2021 letter to shareholders, NFLX asserted that “a more weighted background content slate in Q1 22” and “the current Covid overhang and macro-economic challenges in multiple parts of the world as LATAM (Latin America)” were responsible for the weaker-than-expected subscriber forecast for Q1 2022. In other words, Netflix’s subscriber growth numbers could catch up in the rest of 2022, assuming that the pandemic is gradually fading and that its “hit shows” emerging from the 2022 content slate are once again attracting new subscribers.

On the other hand, Netflix might struggle to add new subscribers significantly in mature markets such as the United States. Notably, rival AT&T(T) pointed out during the company’s recent quarterly earnings call that HBO Max should continue to see “national growth as we move forward,” thanks to the fact that “we’re no longer the at high prices in the market. “after Netflix increased prices in the United States. As such, the magnitude of the negative effects (e.g. loss of market share for HBO Max) associated with Netflix’s recent price increase in the United States- United on the company’s UCAN region subscriber growth is still unknown at this stage.

Separately, Netflix explained during its fourth quarter earnings briefing that it had reduced subscription prices in India in an effort to achieve “long-term revenue maximization” by having “subscriber additions higher than offsetting the drop in “revenue per member”. Of course, there is no guarantee that NFLX’s pricing strategy in India will succeed, and there are concerns that Netflix could implement similar aggressive pricing in other markets, which would hurt overall ARPU (average revenue per user). .

Considering the factors I’ve highlighted in this section of this article, it’s easy to see why the market expects a slower pace of revenue growth for Netflix in the coming years. But given that the negatives associated with Netflix are well known and widely factored into its stock price and valuations, I expect NFLX shares to move sideways for the time being.

Is NFLX stock a buy, sell or hold?

NFLX stock remains on hold. I don’t see Netflix’s stock price rebounding any time soon, as I explained in the previous section. More importantly, I consider NFLX’s current valuations to be fair given its growth prospects, which supports my Hold investment rating on Netflix shares.

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