Netflix is down by 69% from its 2021 highs because they lost subscribers for the first time in over a decade! Even though Bill Ackman sold his entire Netflix stake, maybe it’s on sale as I share my initial analysis and observations about Netflix and its streaming competitors.
-Intro Netflix Crashed
-Why NFLX Stock Fell
-Netflix’s Growth Is Slowing?
-Is Netflix’s Moat Broken?
-Netflix Losing Subs & Market Share
-Netflix’s Pricing Power
-Cash Flows, Debt, & Oscars
-Bill Ackman Sold Netflix & Insider Buying
-My Netflix Valuation Estimates
Netflix stock plummeted from its all time high of $701 per share and is now around $200 per share. Netflix’s stock crashed by 35% or over $50 billion of market value on April 20, 2022 when the evening before they announced their earnings report with a net loss of 200,000 subscribers. This is the first time they have lost subs since October 2011!
Netflix had previously projected subscriber gains of 2.5 million in Q1 2022, but they lost 700,000 subs in pulling business out of Russia. They also expect to lose another 2 million subs in Q2 2022.
It’s breathtaking how much Netflix’s market cap has been reduced from its height of $306 billion down to now $95 billion. NFLX is trading at levels last seen in 2017-2018, but their earnings per share and total subscriber base is way bigger than back then.
I recently read Co-CEO Reed Hastings’ No Rules Rules book that explains Netflix’s culture of continuous innovation and reinvention. Netflix thrived when they evolved their business model in the last two decades. Can they do it again now when people want to spend more time outdoors, competition is heating up, and inflation is raging?
Now Reed Hastings is open to providing more consumer choice by offering lower pricing models that are ads-supported. They are also considering going after the 100 million people globally that share Netflix passwords. They would not just take away the access, but ask these additional users to pay maybe $3 to still have access so Netflix collects more revenues.
Many investors likely have soured on Netflix because the growth story suddenly turned into a pumpkin, and now Netflix is a Cinderella without a shoe even though they remain the leading streaming provider.
Although Netflix still has almost 222 million subscribers globally, Disney+ Bundle (with Hulu and ESPN+) now has 196 million subs while Prime has 175 million subs.
While its competitors are taking some of its market share, Netflix is still leading the pack among Amazon Prime, Disney+, Apple TV+, Hulu, HBO Max, Paramount+, and others. I compared the current subscription pricing tiers among these popular streamers.
Is Netflix’s moat broken or has it been breached given recent events? Netflix increased their prices in January 2022 after previously increasing them in October 2020. Is their moat holding strong if this move suggests they have pricing power? Or does having to possibly add advertising revenues dent their pure subscription model competitive advantage going forward?
Although Netflix did not anticipate a reversal in their subscriber growth, they added a third to their subscriber base since 2019. In Q4 2019 they were at 167.1M subs, then added 36.5M by Q4 2020 to reach 203.6M subs! Since then they added another 18M to 221.6M subs globally! In the US and Canada they may have saturated the market in hitting 75M subs in Q4 2021.
Even though Netflix is flexing its pricing power by charging the most out of any streaming service, they are still cheaper than many cable providers like Verizon and Comcast. Even if your family has 5 streamers, you’re probably still saving money by cutting cable.
Netflix’s free cash flow picture is not great. But can they maintain their earnings power and generate enough cash to afford their high amount of debt? This could affect the company’s valuation.
As far as what investors are doing, it’s somewhat mixed, but Bill Ackman sold all of Pershing Square’s 3 million shares of Netflix by April 21 that he originally bought in late January 2022. On an original $1.1B, Pershing Square locked in $400M in losses. Reed Hastings last bought shares in late January and hasn’t since, though you would think it’s even more on sale now. Bill Ackman explained they can no longer predict Netflix’s future growth as a business, so they can’t invest for now.
As a sidebar, Hulu may be bringing in $3B in ads, and it’s got 45M subs. So I estimate Netflix could bring in $5B in ad revenue.
I did some initial valuation calculations on Netflix, and got between $100-$385 per NFLX share. The valuation varies depending on what growth rates and future PE you give it. I think they can deliver at least $5 EPS ever year (they delivered $11 EPS this past year), so that would put the mark at around $200 per share. Not advice but food for thought! Lets see how the plot thickens from here!
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