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Is It Showtime for Netflix Shares?

·4 min read

Netflix NFLX shares have plunged in 2022. The chart below illustrates the performance of Netflix shares year-to-date compared to a few peers, Roku ROKU and Disney DIS.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

First, let’s look at what’s fueled this move downwards.

Subscriber Slowdown & Rising Competition

A rapidly increasing number of digital streaming services has no doubt impacted Netflix. A few of these streaming services include Amazon Prime Video AMZN, Apple TV AAPL, Roku ROKU, and Disney+ DIS.

These services have been gaining rapid traction, making the industry much more competitive. Simply put, Netflix is no longer the go-to streaming service that it once was for many people.

Peeling back the pages, in 2021 Q4, the company provided disappointing guidance that it expected new subscriber adds of 2.5 million in 2022 Q1 vs. the consensus of seven million expected.

This is where the trouble began.

Fast-forward to 2022 Q1, and the company reported losing more than 200,000 subscribers in the quarter. It was the company’s first subscriber loss in a decade, and the market priced in this growth slowdown – shares plunged 35% the following day.

Netflix provided further disheartening guidance, forecasting a drop of two million subscribers in 2022 Q2. It seemed that NFLX investors just couldn’t catch a break.

However, Netflix posted a much stronger than expected earnings report yesterday, reporting that it had lost fewer subscribers than the previous guidance of two million.

In turn, NFLX shares soared in pre-market trading. Let’s break down the earnings release to see if Netflix shares are worth another look amid a growth slowdown.

Q2 Earnings Recap

Netflix reported quarterly earnings of $3.20 per share, good enough to pencil in a sizable 10% bottom-line beat and exceed the Zacks Consensus EPS Estimate of $2.90. Quarterly revenue of $7.9 billion came in marginally under expectations but reflected an 8.6% year-over-year change.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

In addition, the company reported total global streaming paid memberships at 220.7 million, a 5.5% year-over-year uptick.

The metric everybody was watching closely was global streaming paid net additions. In a big surprise, the company reported that it had lost approximately 970,000 subscribers during the period, half of its previous guidance of two million subscriber losses.

Sometimes, bad news is still good news.

Additionally, the company provided some positive news regarding its cash flow and capital structure.

Netflix expects annual positive FCF moving forward due to increasing revenue, profitability strength, and the successful multi-year evolution of its content model; the company has been transforming its service from licensed second-run content to mostly Netflix originals.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Free cash flow for the quarter was reported at $13 million, compared to -$175 million from the year-ago quarter. Furthermore, net cash generated by operating activities totaled $103 million, up from -$64 million in the year-ago quarter.

Moving Forward

The company soon plans to implement an ad-based subscription tier targeted for a launch in early 2023. In addition, the company has announced that Microsoft MSFT will be its technology and sales partner for this venture.

Netflix forecasts paid subscriber net adds for 2022 Q3 at one million, well below the 4.4 million added in the year-ago quarter. However, it does break the company’s current streak of quarterly subscriber losses.

NFLX is also in the early stages of monetizing more than 100 million households that share accounts and are not direct subscribers. The company is launching two different approaches in Latin America to learn more about and alleviate the issue.

Bottom Line

A staple in many portfolios over the years, the tide has quickly shifted for Netflix throughout 2022, sending shares plummeting. Increasing competition and a slowdown in subscriber growth have fueled the poor share performance.

However, the company has made very positive progress and expects positive annual FCF moving forward. In addition, an ad-based subscription tier and monetizing households who currently utilize but do not pay for the streaming service will undoubtedly aid the top-line once implemented.

Netflix is currently a Zacks Rank #4 (Sell) with an overall VGM Score of a C.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report

Apple Inc. (AAPL) : Free Stock Analysis Report

Microsoft Corporation (MSFT) : Free Stock Analysis Report

Netflix, Inc. (NFLX) : Free Stock Analysis Report

The Walt Disney Company (DIS) : Free Stock Analysis Report

Roku, Inc. (ROKU) : Free Stock Analysis Report

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