Should we add Netflix to our investment portfolio?

It is not a good year for investing in stocks, but ask Netflix... In April of this year, the streaming services company announced in its Q1 2022 results that it had lost customers for the first time in a decade . This shocking news caused its share price to drop 35% in a single session. Six months ago we wrote an article explaining whether Netflix It was presented as a long-term opportunity. And having recently reported results, let's see if Netflix presents itself as a good stock investment. 

What has Netflix reported?​

During the first two quarters of the year, Netflix kept losing subscribers. Until the arrival of the third quarter, where Netflix has achieved 2,4 million users, growing in all regions of the world. At the same time, it also exceeded its growth projections and analysts' forecasts. This has allowed it to increase its profits and income. The American giant expects to add another 4,5 million customers this quarter. 

This would lead the streaming service to end 2022 with 227,5 million customers, 2,6% more than it had at the end of the previous year. Obviously it is not the growth boom that it experienced during the pandemic, but it is a glimmer of hope after this tough year.

What is Netflix's plan to change things?

1. Address price-motivated subscription cancellations

Rising prices of basic goods have pushed many people to cut back on expenses, such as subscriptions to streaming services. This fact is having quite an impact as streaming services make their subscriptions more expensive, reducing the growth forecasts for investment in shares of the streaming services sector. Netflix's response to this situation is a cheaper version of its ad-supported service, which it plans to launch in 12 countries next month.

According to the company, demand for the new service is high and is expected to reduce customer cancellations while attracting new users. Plus, at $7 a month, Netflix's ad-supported service is competitively priced. This Netflix plan is $3 a month cheaper than the ad-supported version of HBO Max and $1 less than the upcoming ad-supported Disney+.

2. Income at no cost thanks to advertising

From Netflix they claim that they have already acquired hundreds of advertisers, having sold most of their advertising spots for the new service before its launch in November. Selling ads will generate a completely new source of income for Netflix, at no cost. According to Ampere, the media analytics company, Netflix will earn $5.500 billion in annual advertising revenue by 2027.

3. Make money from people who use the service but don't pay for it

Of Netflix's 223 million paying subscribers, there are another more than 100 million who use the platform without paying. The plan to monetize those viewers is based on two ways:

-Take measures against password sharing. This goes hand in hand with a new «profile transfer» which makes it easy for password borrowers to transfer their Netflix profile to their own account. With this measure they hope to generate more paying subscribers. 

-Allow subscribers to create sub-accounts for their friends or family in exchange for an additional monthly fee. With this measure they hope to generate more income.

Do subscribers have weight over the results?​

While investors have long analyzed Netflix based on the number of subscribers it adds each quarter, the company prefers to be analyzed based on more traditional financial metrics. Referring to metrics such as revenue and operating profit, especially as customer growth grows in its core markets. To reinforce its words, Netflix has said it will no longer provide subscriber forecasts to investors. On the revenue front, the new ad-supported service and password-sharing features are expected to play a big role. But that's not all, because it is also expanding in the mobile gaming industry, which represents another possible new source of income. In total, according to analyst forecasts, Netflix is ​​expected to see its revenue grow at a compound annual growth rate (CAGR) of 9% between 2022 and 2025. That's a faster pace than the average US company.

As for operating profits, Netflix is ​​expected to earn between $5.000 billion and $6.000 billion this year. And throwing a barb at its rivals, the company said its competitors are investing heavily to boost subscribers and that they are all losing money in the attempt, with combined operating losses in 2022 well above $10.000 billion according to its estimates.

How are Netflix stock valuations now?​

Subscriber numbers are becoming less relevant and investors should focus on operating profit, we should evaluate Netflix's valuation using its forward price-to-earnings (P/E) ratio. The company is now worth 26,3 times its forecast earnings for the next 12 months.

This figure is higher than Disney's 19,1 times. Compared to the Nasdaq average, Netflix has stronger growth prospects, better profit margins, and generates a higher return on equity. 

Is Netflix a good stock investment opportunity?

After nine months have passed since the big crash in Netflix shares, we have seen that it was exaggerated. On the other hand, it also offered us a great entry point. Since then, the company has once again grown in subscriber numbers and its shares have risen more than 60% from the low they reached in May.

Netflix's outlook remains favorable. With a possible economic recession on the horizon, many American companies could see their profits reduced. Netflix, for its part, has many avenues to generate near-term earnings growth. From selling ads, monetizing non-paying users, expanding into mobile gaming, raising prices... After all, the company is expected to generate $2.000 billion in free cash flow (FCF). Cash Flow in English) next year, or 1,7% of its market value. That is, the company can buy back 1,7% of its shares next year, and potentially every year, which translates into good expectations for future growth. 

Plus, if all else fails, they could buy back their own shares, generating earnings per share (EPS) growth. For the moment, Netflix is ​​presented as a good investment opportunity in shares with all the improvements it intends to incorporate. We will see in the following months if it is reproduced in its results...