NFLX with Nobias technology: Netflix Shares Have Fallen 25% Since Mid-November. Is Now The Time To Buy?
Netflix (NFLX) was one of the best performing stocks over the last decade, up nearly 3,800%. The stock was a major winner of the pandemic period in 2022 as well, due to the stay-at-home economy driving tens of millions of households into the Netflix streaming universe. However, these strong results have made year-over-year growth comparisons difficult throughout 2021, causing NFLX shares to underperform. During the past year, the S&P 500 was up 22.79%. Netflix shares were up only 4.96% during this same period of time.
Much of this relative underperformance is due to a recent sell-off, which Netflix shares falling down some 25% since hitting all-time highs in the middle of November. With this significant sell-off in mind, we wanted to take a look at what the credible authors and analysts that we follow here at Nobias have had to say about NFLX shares to see whether or not this is a dip that investors should consider buying.
Demitrios Kalogeropoulos, a Nobias 4-star rated author, recently touched upon Netflix’s 2021 underperformance and his bullish outlook for 2022 in an article at The Motley Fool. Kalogeropoulos said, “Sure, the subscription streaming video leader isn't growing as quickly as it was during the early phases of the pandemic, or even before COVID-19 placed new premiums on at-home entertainment. But the business is still outpacing industry peers even as it shows off its new profitability strengths.” While it’s true that NFLX shares didn’t perform up to expectations during the last 12 months or so, the fact is, the company remains a strong growth stock.
NFLX Jan 2022
Kalogeropoulos highlighted the company’s recent performance and near-term outlook, saying, “Sales are up 20% through late September but rose just 16% in the most recent quarter. That 16% pace is a potential worry for investors since Netflix aims for at least 20% annual gains. The company hasn't issued an official 2022 forecast yet, but most Wall Street pros are predicting a 15% increase ahead.” As dominant as Netflix appears to be in the streaming space, Kalogeropoulos points out that, “The company only accounts for about 6% of TV screen time in the U.S. and could easily push that number higher as it bulks up the content portfolio in niches like animated films, hit series like Squid Game, and video games.”
On the bottom-line, we’ve seen a slowdown of growth as well. During the last 5 years, from 2017-2021, Netflix has produced annual earnings-per-share growth of 191%, 114%, 54%, 47%, and 76%, respectively. Obviously the company won’t be able to average this ~100% annual growth in perpetuity. As Netflix matures, its growth rate will fall. Yet, the recent sell-off in the stock seems to point towards the fact that investors aren’t happy to pay the same premium that they paid for 50%-100% growth in the past for the lower growth that Wall Street expects to see moving forward (right now, the consensus earnings growth rates for Netflix in 2022 and 2023 are 20% and 30%, respectively). However, it is important to note that there are highly respected analysts that believe NFLX has higher growth potential in the near-term.
Benjamin Rains, a Nobias 5-star rated author who posts articles at Zacks, recently said, “Looking ahead, Zacks estimates call for Netflix’s adjusted FY21 EPS to soar 77% on 19% higher sales that would see it pull in $29.70 billion. The company is then expected to follow that up with 24% higher earnings in 2022 and 14% stronger revenue to reach $33.95 billion.” Even so, the stock is going through a re-rating period as the market attempts to establish new expectations for NFLX shares. Netflix is currently trading with a blended price-to-earnings ratio of 48.7x.
The stock’s forward price-to-earnings ratio (based upon the current analyst consensus estimate for 2022’s full-year earnings-per-share of $13.06) is 40.25x. Moving forward, due to Netflix’s recent focus on cash flows (now that the company has reached massive scale on the global stage), the stock’s EPS growth has the potential to push the forward P/E ratio down even further. However, this still means that NFLX trades for roughly twice the price of the broader market (the S&P 500’s current forward P/E ratio is in the 21x area). Yet, as Rains points out, the stock’s current valuation is the lowest that it has seen in roughly a decade and therefore, he believes that the shares offer strong upside potential.
Rains said, “Netflix’s fall has pushed it well below oversold RSI levels (30 or under) at 23. The drop, coupled with its impressive EPS growth outlook, has NFLX trading at decade-long lows at 40.3X forward 12-month earnings. Along with its discounted valuation, Netflix trades 25% below its current Zacks consensus price target.” Kalogeropoulos also noted that rising cash flows could be a bullish catalyst for the stock in the coming years, saying, “Cash flow is another factor that will likely push Netflix shares back toward all-time highs. Co-CEO Reed Hastings and his team are targeting positive cash generation this year for the first time since Netflix embarked on its transition to streaming video.”
He continued, “Cash flow might easily approach 15% of sales over time, CFO Spencer Neumann has estimated. Those resources will allow the company to spend more than even rivals like Disney (DIS) could hope to manage. It will also likely fund aggressive stock-purchase spending in 2022 and perhaps a big dividend payment further down the road.”
Kalogeropoulos shed light on a recent quote from Neumann which showed that NFLX’s international growth is far from over: "We think we have a super long runway here," Neumann told investors in September, "to address ... upwards of 1 billion pay TV households ... around the world." Right now, Kalogeropoulos said, Netflix only has 222 million subscribers.
Rains broke down the company’s recent subscriber growth figures in a recent report saying, “Most recently, NFLX topped third quarter earnings and user estimates to close the quarter with 9% more users at 213.6 million. Executives projected similar YoY user growth in the final quarter of 2021 to end the year with 222.1 million global users.” He concluded his bullish piece saying, “But for growth at scale, combined with spiking earnings and cash returns, Netflix is in a class of its own.” This is why Kalogeropoulos believes that Netflix could grow to a market cap of $300 billion during 2022, which would represent significant growth compared to its current market cap of approximately $230 million.
Kalogeropoulos’s colleague at The Motley Fool, Neil Patel, who is a Nobias 5-star rated author, has also recently posted a bullish note on NFLX shares. Patel said, “I think it's completely realistic for Netflix to reach $700 a share by the end of 2022.” Right now, Netflix shares trade for $525.69, which means that this ~$700 target represents upside potential of greater than 33%. Patel said, “The pandemic caused major production delays in 2020, leading to a lighter content slate for Netflix at the beginning of this year. Therefore, it shouldn't surprise anyone that membership growth in the first half of 2021 was weak.” But, he noted that the company’s production is “largely back up and running” which means that new hit shows are likely on the way.
Developing content is expensive business. But, as Patel points out, Netflix has financial capability to produce shows for a global audience that its peers cannot match. Patel wrote, “Luckily for Netflix, it has deep pockets and will end 2021 having spent $17 billion in cash on content. Management expects the current three-month period to be the strongest fourth-quarter content offering ever, something that will help bring new customers to the service.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Along these lines, he quoted the Netflix leadership team from the Q3 Shareholder Letter which read, "Assuming no new COVID waves or unforeseen events that result in large-scale production shutdowns, we currently anticipate a more normalized content slate in 2022, with a greater number of originals in 2022 vs. 2021.” Patel also touched upon the company’s potential to hit longer term subscriber growth targets. As he points out, this should help to drive the share price higher. He said, “When it comes to Netflix, Wall Street unsurprisingly fixates on one data point above all else: subscriber growth. This drives the stock price. Having fresh shows and movies on tap for 2022 will help expand the user base, which supports revenue and profit growth.” He continued, “After a couple of lumpy years, I think it's fair to assume that Netflix can add 25 million subscribers in 2022.”
This would push its global subscriber count up to nearly 250 million. And, while 25 million additional subs would mean that NFLX’s growth rate would be slowing, Patel said, “Even a more mature Netflix can provide outstanding returns for shareholders in 2022.” Overall, when looking at the community of credible authors that the Nobias algorithm tracks, we see that 87% of recent articles published have expressed bullish opinions.
Since the start of 2022, 6 out of the 7 articles published by Nobias 4 or 5-star rated authors have offered “Bullish” outlooks. And, when looking at the blue chip Wall Street analysts that we track (4 and 5-star rated individuals) we see that the average price target placed on NFLX shares is currently $677.82. This isn’t quite as high as Patel’s $700 near-term target; however, it is roughly 28.9% above the stock’s current share price. Currently, Netflix’s 52-week high is $700.99. The stock hit that high in November of 2021. With that in mind, a retracing to those levels offers significant upside to bullish investors from today’s levels.
Disclosure: Of the stocks discussed in this article, Nicholas Ward is long DIS. However, he may take advantage of the recent sell-off that NFLX shares have experienced recently and add NFLX shares to his personal portfolio in the near future. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.