Netflix shares are down about 65% for the year, let’s look through some numbers and set aside our emotions.
Netflix with about 221.64 million subscribers[i] globally has, for the first time in a decade, lost approx. 200,000 subscribers.
To put that number in perspective, that is a loss of approximately .09% (less than one-tenth of one percent), let that sink in for a moment. Netflix is forecasting an additional loss of about 2 million subscribers in the next quarter, which would decrease the subscriber base by another .81% (after the above-mentioned loss). Taking into consideration the past decade of persistent net subscriber growth it would seem natural that at some point the growth rate would diminish (ROIC or, return on invested capital, tends to plateau for companies that go through large growth periods).
Analysts have shifted into the “Hold/Neutral” territory, but I find myself in the Buy camp (understanding that I am by no means calling this a bottom).
Source: Bloomberg Finance L.P.
Used with permission of Bloomberg Finance L.P.
There are a few interesting Market Metrics to consider:
1. Trading Volume in Netflix is more than double its 20-day average.
Implied Volatility was at 58%
2. The RSI (relative strength index, a technical indicator) fell below 30, suggesting that the stock is being oversold.
3. Short interest spiked dramatically last week but bid/ask spreads were rather balanced.
4. NFLX is trading at about 19 times its estimated earnings.
As of April 22nd, Netflix’s balance sheet had:
1. $17.54 Billion in Total Equity, $6.01 Billion of which was in Cash and Cash Equivalents.
2. Total Liabilities and Shareholders Equity of $45.33 Billion
3. 444.27 million Shares outstanding (fairly consistent value historically)
According to the latest numbers on my Bloomberg Terminal:
1. Market Cap as of today is: $93.257 Billion
2. Current Enterprise Value is: $104.548 Billion
Last year, Netflix had total revenues of $29.7 Billion and a gross profit of $13.79 Billion. While the subscriber base has indeed shrunk (modestly but still a negative), and projections point to a further decline in subscribers I feel that losing about 2/3 of the company market capitalization is excessive. I believe that Netflix was indeed overvalued at $700/share, but a company that has managed to generate such shareholder value from a non-diversified product offering has the potential to create diversified streams of revenue, even by simply adding different “flavors” to its subscription model (i.e. the way Hulu offers a cheaper subscription with ads).
Net Income Projections are still attractive through 2024, although we can expect a bumpy 2022. Long-term, I am bullish on Netflix (especially at this valuation). I’ll continue to be a shareholder and subscriber because I believe there is value in this company, especially at the current share price. I also see this as a potential turning point for Netflix, motivating them to make the appropriate changes to their business model. If you’d like to discuss price targets please reach out to me directly. I like Netflix because of its balance sheet and its strong potential for international growth, my expectation is that this will be a very painful learning experience for the company, but not the end of the company.
Source: Bloomberg Finance L.P.
Used with permission of Bloomberg Finance L.P.
As always if you’d like to discuss Netflix more in-depth please call me! The point of this (very) short report is to give perspective on dramatic moves in the market and think about things rationally. This is not a recommendation to buy or sell the security but to call me to discuss how doing so (or not doing so) can impact your financial plan. Tim Marian Portfolio Manager Investment Management | Shadowbrook Private Wealth CERTIFIED FINANCIAL PLANNER®, Certified Investment Management Analyst® 646-884-4874 Tim.Marian@shadowbrookwealth.com ShadowbrookWealth.com [i] https://www.nytimes.com/2022/04/19/business/netflix-earnings-q1.html#:~:text=Netflix%2C%20with%20221.64%20million%20subscribers,of%20all%20the%20streaming%20services.
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