Netflix (NFLX) released fourth quarter financial results on Thursday evening. The reaction was a swift and violent as an angry Claymore two-handed downward (zornhaw) cross-strike.
The company posted GAAP EPS of $1.33, which crushed the Wall Street's outlook. Revenue generation amounted to $7.71B, which was in line with estimates and good for year over year growth of 16.1%.
Why the Hate?
Obviously, those top and bottom line numbers did nothing to provoke this level of violence. It has to do with decelerating growth, not a lack of growth, but a slowing down of the advance. Netflix projected that the streaming service giant would likely add just 2.5M new subscribers for the first three months of 2022, which is a long way from the 4M or so that Wall Street was looking for. It's the last quarter too. Netflix posted a net add of 8.3M subscriptions for the last three months of the year. Sizzling, right, brings up the total of paying subs to 222M, and up from adding just 4.3M subs for the third quarter. The catch there is that expectations for the fourth quarter really started at 8.4M (uh oh) and ranged up to 8.7M.
The stock fell more than 20% overnight, after closing at $508.25 on Wednesday. The lowest price that I saw overnight was a $398 print that went by in a shot. The pin action created by such a large company ($225.1B 24 hours ago) taking such a significant hit was broad. Almost every single name with a competing streaming service suffered at least some pressure. Most not quite to the same degree, as this is the whole business for Netflix and the others for the most part have other businesses that drive cash flows that can subsidize their streaming operations even at a loss if necessary.
On Thursday night, Netflix acknowledged that the competition has been intensifying, and in a revelation that I don't know Netflix had ever had to make before... stated that this competition "may be affecting our marginal growth." The firm's operating margin dropped to 8% for the fourth quarter, down six full percentage points, despite the fact that the firm spent less on content creation than projected. On that note, Netflix has one forecast that operating margin will drop to 20% for the full year 2022 from 21% in 2021.
Netflix has also announced (last week) price increases going forward. The U.S. basic plan goes from $8.99 per month to $9.99. The standard and premium plans will go from $13.99 and $17.99 to $15.49 and $19.99, respectively. Does it make sense? I guess Netflix has to. The competition is feeling the pinch as well. That said, even with price increases themselves, the Disney (DIS) bundle, which includes Disney Plus, Hulu and ESPN Plus is priced at $13.99 per month (with commercials on Hulu). How can Netflix compete with that, especially for a household that includes children and in a tougher economy?
Am I biased? Maybe. I am long Disney. I am also long Netflix (got long overnight at $407.50 for a trade). I am also long competitors such as Apple (AAPL) , Amazon (AMZN) , and ViacomCBS (VIAC) , but not Comcast (CMCSA) or AT&T (T) . That's a lot of competition, and I am not even trying to name them all. They are all cheaper for consumers though, and some of them are excellent.
Not in as good shape as I expected. Don't get me wrong. Netflix is not about to roll over. That said, current liabilities are now larger than current assets, even with $6B in cash. I certainly did not expect that, as this was not the case three months ago. Total assets are still comfortably larger than total liabilities with less equity. That ratio has not changed materially, but the "current" situation did startle me. Oh, one more thing, as of the end of December, the tangible book value of Netflix per share was $-33.98. Yes, that's a minus sign. As of the end of September, that number was $4.97. Ouch.
Since last night, I have noticed 17 analysts rated at five stars by TipRanks who have opined on Netflix. There are plenty more, but I am only dealing with five stars here. Of the 17, we now have 10 "holds" or hold equivalents, six "buys" or buy equivalents, and one "sell." Of these 17 analysts, five do not offer target prices, while the average target price of the other 12 is $521.67. The highest target is $650 (Daniel Salmon at BMO Capital) and the low is $420 (William Power of Robert W. Baird). Our "sell" is Laura Martin at Needham. She is one of the five with no target price.
There is no need for a chart. The stock is likely to open a rough $100 below where it went out on Thursday. That will put NFLX all the way back to June of 2020. I bought the stock for a trade, because it seemed like some support had built up in the area slightly above $400. Of course overnight support is practically meaningless once the bell rings.
Netflix is a trader now, not an investment. Netflix is no longer part of FANG, no longer a true "growth" name. Oh it's growing, but it is not a "growth" stock and had been priced like one. That's over.