Netflix; The COVID Glow Has Worn Off
If you have been worrying about the stock market and the risks of a correction Netflix (NASDAQ: NFLX) Q4 aren’t going to make you happy. It’s not so much that results are bad so much as they aren’t dazzling like they’ve been so often in the past. Worst, the company reports slowing subscriber growth that suggests the COVID-induced tailwinds are gone. What this means for Netflix shareholders is a 20% after-hours drop that puts the stock at its lowest levels in over 18 months. We’re not predicting bad things for other FAANG names, other media stocks, or other pandemic winners but if other company’s report anything like what Netflix reported the budding stock market correction we are now in will get very deep indeed
Netflix Falls On Mixed Results
Netflix had a good quarter despite the slowing growth. The company reported $7.71 billion in net revenue for a gain of 16.1% over last year’s 21.0% increase. The first hurdle for the market though, is that revenue is only as-expected in regards to the Marketbeat.com consensus but that isn’t why share prices are falling. On a membership basis, subscribers grew a net 8.9% versus the 21.9% post last year and the forecast for the next quarter is even weaker. That’s why shares are falling.
Moving down the report, there is other good news but the mixed quality was not enough to spur investor appetite. The company reported a 600 basis point decline in operating margin due to an increase in content spending during the 4th quarter. The good news is that margin contraction was less than expected due to lower than expected spending. In our view, the news is a necessary investment in the company’s business but the ROI (in the form of net new subscribers) appears to be declining. On the bottom line, the $1.33 in GAAP earnings beat the consensus by $0.50 but all of the strength is due to weaker than expected content spending.
Looking forward, the company is expecting to see subscriber growth in Q1 and FY 2022 but at a slower 8.0% rate. This may be a weak outlook given the amount of content spending the company has done but the risk is definitely to the downside.
The Analyst Reset For Netflix Has Begun
The analysts are still bullish on Netflix with a weak Buy rating but the reset in sentiment has begun. Not only were there several notable price target reductions leading into the earnings report but the post-report action isn’t too encouraging. There’s been only one shout-out so far but that came with no official rating, from Barclays, but did come with a very, very low price target. Barclays set its price target at $425, not the lowest on the street, but well below the current consensus of $654. The $654 consensus implies about 30% of upside from the pre-release closing price but that margin has widened in after-hours trading. The $425 target assumes the stock is fairly valued with the 20% drop and we think more downgrades are on the way. The consensus target has been trending lower over the past 30 and 90-day periods
The Technical Outlook: Netflix Implodes
Shares of Netflix were already down roughly 30% from the last all-time high and have caved another 20% in after-hours action. The decline has shares trading at the lowest levels since the spring of 2020 and price action may fall further. The caveat is that price action is sitting on/at a key support level that could produce enough buyers to hold up prices. Assuming the stock can hold this level, we see Netflix moving sideways and then struggling to move higher. If the stock falls below this level a move down to the pandemic low is expected.
Netflix is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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