Netflix's (NFLX 0.50%) stock plunged 26% during after hours trading on April 19 following the release of its first-quarter earnings report.
The streaming video giant's revenue rose 9.8% year-over-year to $7.87 billion, but missed analysts' estimates by $70 million. Its paid subscribers grew 6.7% to 221.64 million, but it missed its own target for 8% growth.
It also lost 200,000 subscribers, which represents its first quarter-over-quarter loss of subscribers since 2011. It expects to lose another two million subscribers sequentially in the second quarter.
Image source: Getty Images.
As Netflix's top-line growth decelerated, its operating margin fell 230 basis points year-over-year to 25.1% as it ramped up its spending on new content. As a result, its net income declined 6% to $1.60 billion, or $3.53 per share, which still beat analysts' conservative estimates by $0.62.
Unfortunately, Netflix's loss of subscribers overshadowed its earnings beat, and its stock dropped to its lowest levels since late 2018. Should investors consider buying this beaten-down FAANG stock after that steep decline?
NASDAQ: NFLX
Key Data Points
Why is Netflix's growth peaking?
Netflix steadily gained subscribers over the past decade as it produced more original content and expanded overseas. Its usage of AI algorithms to analyze viewing habits also enabled it produce hit new shows and movies without relying heavily on established IPs and franchises.
But over the past few years, well-funded competitors like Disney (DIS 1.01%), Amazon (AMZN +3.47%), and Warner Bros. Discovery (WBD +0.63%) saturated and fragmented the streaming market.
Netflix's robust growth throughout the pandemic masked those competitive threats as more people stayed at home and streamed more videos, but its subscriber and revenue growth decelerated as the lockdowns ended.
|
Period |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Paid Subscribers (Millions) |
207.64 |
209.18 |
213.56 |
221.84 |
221.64 |
|
Growth (YOY) |
13.6% |
8.4% |
9.4% |
8.9% |
6.7% |
|
Revenue (Billions) |
$7.16 |
$7.34 |
$7.48 |
$7.71 |
$7.87 |
|
Growth (YOY) |
24.2% |
19.4% |
16.3% |
16% |
9.8% |
Data source: Netflix. YOY = Year-over-year.
In Netflix's fourth-quarter and first-quarter shareholder letters, it started citing competition as a major headwind. That isn't surprising at all: Disney ended its latest quarter with 196.4 million streaming subscribers across all of its services, and WBD serves nearly 100 million streaming subscribers across HBO Max and Discovery+ following its spin-off from AT&T (T 1.54%).
In the first quarter, Netflix also attributed its slowdown to passwords being shared to over 100 million additional households worldwide. It claims those shared passwords made it "harder to grow membership in many markets -- an issue that was obscured by our COVID growth."
During the conference call, Netflix's COO Gregory Peters said it wouldn't "shut down that sharing," but it could start asking members to "pay a bit more to share the service with folks outside their home." Netflix co-CEO Reed Hastings also said the company could also explore cheaper ad-supported plans in the "next year or two" to reach more "advertising-tolerant" subscribers.
Lastly, Netflix's sequential loss of subscribers in the first quarter was largely caused by the suspension of its services in Russia in response to the Russo-Ukrainian war. Excluding Russia, Netflix would have gained about 500,000 subscribers sequentially instead of losing 200,000 subscribers.
But even after excluding Russia, Netflix still missed its own guidance by about two million subscribers. Its expectations for another sequential drop in the second quarter indicates that Russia isn't the main problem.
Stabilizing margins and free cash flow growth
On the bright side, Netflix's operating margin rebounded sequentially in the first quarter and exceeded the company's own guidance. That recovery, which follows three quarters of heavier spending on new content, enabled its free cash flow (FCF) to turn positive again even as its earnings per share (EPS) slipped.
|
Period |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Operating Margin |
27.4% |
25.2% |
23.5% |
8.2% |
25.1% |
|
FCF (Millions) |
$692 |
($175) |
($106) |
($569) |
$802 |
|
EPS Growth (YOY) |
139% |
87% |
83% |
12% |
(6%) |
Data source: Netflix.
In the second quarter, Netflix expects its revenue and EPS to grow 10% and 1%, respectively, as its operating margin dips back to 21.5%. For the full year, analysts expect Netflix's revenue to rise 12% as its EPS drops 1%. Its operating margin is expected to drop 90 basis points to 20%.
That outlook seems mediocre, but I believe it merely implies that Netflix's business is maturing instead of falling off a cliff.
Is Netflix getting too cheap to ignore?
Prior to Netflix's latest earnings report, its stock looked a bit pricey at more than 30 times forward earnings. But after its post-earnings decline, it trades at about 23 times forward earnings. That's a reasonable price-to-earnings ratio for a maturing tech giant, but I wouldn't call it a value play just yet.
I told investors to stick with the other FAANG stocks before Netflix's last post-earnings plunge in January, and I'm sticking with that call. It just doesn't make much sense to invest in a company with slowing growth and rising expenses when plenty of other high-quality stocks are still on sale.
