Netflix's subscriber growth was set to slow after the subscription boom it received in 2020. But not everything lasts forever, as it lost viewers for the first time in a decade this past quarter. That caused the percentage of analyst buy ratings on the company's stock to plummet to an eight-year low. It also caused Pershing Square by Bill Ackman sell the stake of more than one billion dollars that he accumulated just a few months ago. But with Netflix's share price now up more than 60% this year, your skepticism could show us a big opportunity...
Why are Netflix subscribers falling?
Share password
Netflix estimates that in addition to its 222 million paying subscribers, there are more than 100 million people who use the service without paying for it. The company is now exploring ways to monetize those viewers, for example by cracking down on password sharing, which in turn forces some of them to sign up. Or you can ask subscribers who share their account details to pay more (something you're already experimenting with in Chile, Costa Rica, and Peru). So, password sharing might have been a reason for slowing subscriber growth in the past, but it could actually be a growth opportunity for the company in the future. If Netflix can, say, subscribe to just a quarter of those 100 million, it could increase its user numbers by 11%.
More competition掠
This has always been one of the company's great concerns, and always will be. Media companies are expected to spend $230 billion or more on content this year as streaming share wars intensify, according to one report. The only positive point we can make here is that Netflix remains miles ahead of most of its competitors outside the US, thanks to its huge investments in foreign programming. The South Korean success of “The Squid Game,” for example, helped Netflix add 1 million subscribers in the Asia-Pacific region last quarter, the only region where the company managed to increase the number of users. .
Customer cancellations
The rising costs of living necessities are pushing people to cut back on luxuries like streaming services, a decision that becomes even more crucial as companies raise prices. But if you believe that inflation will eventually come down and that wages will recover, restoring consumer purchasing power, then this may only be a temporary setback. Meanwhile, Netflix is working on a potential solution: It plans to create a lower-priced, ad-supported version of its service. That could help reduce price-driven cancellations, while attracting new users and creating a new revenue stream from ads. But although HBO Max, which has implemented a similar strategy, hasn't seen its subscribers from the more expensive ad-free plans switch to the cheaper option (yet), that's still a risk for Netflix.
How has all this impacted Netflix's valuation?
Netflix is now worth 3 times its forecast sales for the next 12 months – at the lowest level since early 2015 and well below its five-year average. Now, Netflix's growth potential is weaker than it has been at any time over the past five years, so it's rational for its stock to trade at a lower P/S ratio. But still, we can say that the 57% discount it is currently trading at is starting to look a little unfair. Additionally, Netflix's price-to-sales (P/S) ratio is now 30% lower than the Nasdaq 100 index. This is the first time since January 2013 that Netflix's P/S is trading at a discount to the Nasdaq . Simply put, Netflix is at a deep discount on both its own history and the broader stock market (Who doesn't love a good deal?
But as Netflix's subscriber and sales growth slows, operating leverage and the company's ability to generate profits will likely become more important than sales. So maybe we should look at the price-to-earnings (P/E) ratio instead of the price-to-sales ratio. Netflix is now worth 19,4 times its expected earnings for the next 12 months, in line with Home Depot, another winning stock of the pandemic. That's important because Netflix's valuation is on par with a low-growth company, even though the streamer has many potential avenues for growth, from converting those 100 million non-payers, to selling ads (a revenue stream completely new) and expand to mobile devices. gaming.
If all else fails, Netflix could see its depressed share price as an opportunity to buy back its shares, leading to earnings per share (EPS) growth. The company's free cash flow (FCF) totaled $802 million last quarter. On an annualized basis, that represents 3,2% of the company's market value. Put another way, the company can buy back 3,2% of its shares each year (all else being equal), which would increase the EPS ratio annually by a similar amount.
So, is it a good option to invest in Netflix?
As we have seen, the scenario becomes interesting due to several points that we have observed: (i) If we buy Netflix shares today, we are basically buying them at a valuation adjustment of the characteristics of a low-growth company. That means we get a free “call option” on any future growth the company can generate. And as for Netflix losing subscribers in the last quarter, all the reasons are temporary setbacks or even potential growth opportunities. (ii) Increased competition is a concern and is arguably the biggest risk (beyond customers canceling their subscriptions or switching to cheaper plans). With the growth of competition, streamers have to constantly spend on new content to attract viewers, especially since the most popular series or movies can be watched in a single night. (iii) This huge but necessary expense each year raises questions about the business model as a whole and whether any transmitter can be very profitable. A good analogy is the telecommunications industry. The largest telecommunications groups in the US have to invest heavily every year to offer the best service while keeping prices low because, in practice, they sell the same product as their competitors. And while telecom companies make money, their profitability is nowhere near the astonishing levels found in some parts of the tech industry.