NFLX with Nobias Technology: Case Study on Netflix
After hitting all-time highs of $700.99/share in late 2021, Netflix has experienced a tumultuous first half of the year thus far during 2022, posting -62.2% losses on a year-to-date basis. Netflix struggled during the first several months of the year, due in large part to the risk-off trade that hurt many of the popular growth stocks in the market; however, the pace of its 2022 sell-off accelerated after the company’s first quarter report.
During Q1, Netflix posted its first year-over-year subscriber loss number in more than a decade. Coming into the first quarter print, the company’s guidance called for approximately 2.5 million additional subs. When the official numbers were published, Wall Street was taken aback by a net loss of 200,000 subscribers, causing NFLX shares to fall by more than 20% in the after hours.
That negative momentum remained throughout the rest of the quarter, with NFLX falling from nearly $350/share on April 19th (when the Q1 numbers were released) to 52-week lows of $162.71/share (which the stock hit on 5/12/2022).
Since hitting those lows, Netflix shares have traded in a fairly right range, in the $175-$200 range. However, in recent days the stock has rallied, up more than 15% during the last week alone, due to Q2 results which appeased investors and removed some of the negative sentiment surrounding the stock.
NFLX Jul 2022
Regarding Netflix’s recent sell-off, Nobias 4-star rated author, Stjepan Kalinic, said, “Few large companies experienced a fall from grace with a higher velocity than Netflix, Inc., as it cratered over 70% year to date. Now, the stock is showing signs of bottoming, supported by the fact that the latest results were not as bad as expected.”
In the recent post-earnings article that Kalinic posted at Simply Wall Street, he discussed ongoing headwinds for the company, due to the thesis that over-the-top content streaming has peaked, writing, “For the first time, the company lost subscribers for 2 quarters in a row. It seems that the streaming market has reached its zenith, with the average household signed up to 4.7 services.”
Looking forward, Kalinic appears to be bearish on the company’s ability to return to growth. He stated, “Considering that some of the most popular series like Stranger Things and Ozark ended, the company doesn't have standout content coming out to boost the Q3 numbers.”
Another concern that Kalinic mentioned was rising content costs. He noted that NFLX’s content costs rose by “almost 20% Y/Y” during Q2 and this is having a negative impact on the company’s balance sheet. Kalinic said, “According to the last reported balance sheet, Netflix had liabilities of US$7.74b due within 12 months and liabilities of US$20.0b due beyond 12 months. On the other hand, it had cash of US$6.01b and US$824.7m worth of receivables due within a year. So it has liabilities totaling US$21.0b more than its cash and near-term receivables combined. This deficit isn't bad because, despite the recent crash, Netflix still has a market capitalization of about US$89b. Thus, it could raise enough capital to shore up its balance sheet if needed.”
Kalinic does go on to note that, “Netflix has net debt of just 1.3 times EBITDA, indicating that it is undoubtedly not a reckless borrower.” However, he continues, “Over the last three years, Netflix recorded negative free cash flow in total. Debt is usually more expensive and almost always riskier in the hands of a company with negative free cash flow.”
Concluding his piece, Kalinic wrote, “The most recent results were not as bad as anticipated. However, they're still not great - the company lost another 1 million subscribers as it looks like the streaming wars have saturated the market.” He also cautioned investors, noting, “While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep a close watch on its debt levels lest they increase.”
Stephen Guilfoyle, a Nobias 4-star rated author, also recently wrote a post-earnings update on Netflix shares at The Street. Guilfoyle dove into the Q2 data, writing, “For the three month period ending June 30th, Netflix posted GAAP EPS of $3.20, handily beating Wall Street's expectations, on revenue of $7.97B. The sales number was good enough for year over year growth of 8.6% (13% in constant currency), but not good enough to beat consensus view. Operating income of $1.578B was down 14.6% versus the comparable year ago quarter. Operating margin dropped from 25.2% for Q2 2021 to 19.8%.”
Regarding Q2 subs, Guilfoyle said, “Global streaming paid memberships contracted by a rough 970K subscribers to 220.67M.” Netflix rallied on this ~1 million sub loss, because, in large part, Guilfoyle notes, previous guidance calling for losses of 2 million subs or more.
In other words, Netflix set a very low bar for itself to clear during the quarter. Guilfoyle noted that the stock’s “euphoric response to a number that would have been seen as tragic had the firm not provided such a low bar.”
Guilfoyle continued, breaking down Netflix’s regional performance, stating:
“UCAN (US/Canada) drove $3.538B in revenue (+9.4%), as paid memberships contracted to 73.28M (-0.1%). Average revenue per membership increased to $15.95.
EMEA (Europe, Middle East & Africa) drove $2.457B in revenue (-2.4%), as paid memberships increased to 72.97M (+6.2%). Average revenue per membership decreased to $11.17.
LATAM (Latin America) drove $1.03B in revenue (+19.6%), as paid memberships increased to 39.62M (+2.5%). Average revenue per membership increased to $8.67.
APAC (Asia Pacific) drove $908M in revenue (+13.6%), as paid memberships increased to 34.8M (+22.2%). Average revenue per membership decreased to $8.83.”
Looking ahead at Q3 expectations, Guilfoyle touched upon NFLX’s most recent guidance, stating, “For the current quarter, Netflix sees revenue of $7.838B and diluted EPS of $2.14. Wall Street had been up at revenue of $8.1B and EPS of $2.77 on these metrics.”
However, even though NFLX is guiding for a return to subscriber growth (management is now calling for 1 million+ new net subs during Q3), Guilfoyle is not bullish on the news because “operating margin is expected to sink from Q2's 19.8% to 16.0%.”
He concluded his bearish piece, stating, “I see a problem that I don't think is being spoken of. Netflix still lost a lot of paying customers. A lot of these subscriber losses were in North America. A lot of those folks pay their bills in U.S. dollars. Growth elsewhere, among subscribers paying their bills in their home currency is not a one for one exchange with a lost sub who pays in greenbacks. The outlook bothers me too. Who cares if you add a million subs if doing so crushes margin and pressures earnings?”
Since NFLX’s earnings were posted, a slew of Wall Street analysts have updated their opinions on the stock. Georg Szalai, a Nobias 4-star rated author covered several of these recent analyst notes in an article he published at The Hollywood Reporter.
Szalai highlighted a recent note from Credit Suisse analyst Douglas Mitchelson, a Nobias 4-star rated analyst, who reduced his price target on NFLX shares from $360 to 263, “due to a more conservative long-term forecast.”
Mitchelson said, “Uncertainty remains elevated for Netflix with subscriber growth stalled post-pandemic and (management) focusing on improving monetization via charging for password sharing and broadening the service’s value proposition through lower-priced ad tiers.”
Szalai noted that Mitchelson acknowledged that he “sees some promise” in NFLX’s new endeavors, ultimately, the analyst concluded that they “will take at least well into 2023 to prove out (and perhaps into 2024 to drive meaningful revenue reaccelerating).”
Szalai put a spotlight on a more bullish take from Guggenheim’s Michael Morris, a Nobias 4-star rated analyst, who said, “Key opportunities in advertising and password sharing are taking shape, though still early. Notably, the company’s ambitious pursuit comes with spend discipline, with annual cash content spend of around $17 billion in ‘the right ZIP code’ for the next several years.” Morris maintained his “buy” rating no NFLX shares, with a $265 price target. Morris concluded his note stating, “We continue to see attractive value and optionality in Netflix shares.”
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.
Chris Morris, a Nobias 4-star rated author, also provided cause for optimism for NFLX bulls, penning a piece at Yahoo Finance which highlighted merger activity that was recently announced. He wrote, “Netflix announced Tuesday it plans to acquire Animal Logic, the animation studio behind such hits as The Lego Movie and Happy Feet. It’s an extension of a previous relationship between the two companies, which had previously worked together on Klaus and The Sea Beast, which are Netflix exclusives.”
Chris Morris continued, “The move, which is expected to close later this year, would give Netflix more ownership of its catalog, something critics of the brand have called out as a weakness when compared to other streaming houses, such as Disney+ or HBO Max.”
Overall, the Nobias algorithm is still seeing a very bearish lean amongst the credible authors that we track (only those with 4 and 5-star Nobias ratings). 72% of recent articles published by such authors have included a “Bearish” bias.
The credible Wall Street analysts that we track are more bullish, however. Right now, the average price target that the credible analysts that the Nobias algorithm tracks (once again, only those with 4 and 5-star ratings) is $238.70. After its post-earnings rally, NFLX shares trade for $223.88. Therefore, that average price target implies further upside potential of approximately 6.6%.
Disclosure: Nicholas Ward is long NFLX. 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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