Streaming giant Netflix (NFLX) witnessed its second-biggest rout of the year following a forgettable first quarter earnings report in May, notes observes Todd Shaver, growth stock expert and editor of Bull Market Report.
The company posted $7.9 billion in revenues, an increase of 10% YoY, compared to $7.2 billion a year ago, and profits at $1.6 billion, or $3.53 per share, as against $1.7 billion, or $3.75 per share.
Leaving aside its slowest pace of quarterly growth in years, the company spooked the markets with a net loss of 200,000 subscribers during the quarter, its first quarterly drop in subscriber count in over 10 years.
To put things in perspective, the previous rout following its fourth quarter results was due to the weaker-than-expected projection of 2.5 million new subscribers for the first quarter. And remember, that the company has 222 million subscribers, paying monthly each and every month.
Netflix attributed this to the ongoing war in Ukraine, which forced the company to suspend operations in Russia, resulting in a loss of 700,000 subscribers during the quarter. The company further witnessed rising churn rates owing to price hikes in recent months, resulting in the loss of about 600,000 subscribers, which remains in line with expectations and the company’s own models.
Taking all of this into account, it almost seems like the markets are being unreasonably harsh on the stock, especially as it continues to struggle with the post-COVID overhang, as it adjusts to the more normalized pace of growth, following the upsurge in subscribers in 2020 and 2021. Beyond this, the intensifying competition from the likes of HBO Max, Apple TV, and Disney+ is further dampening spirits.
With this, the company is finally shifting gears and is now going after unlocking value from its massive user base. This includes a crackdown on password sharing, with an estimated 100 million non-paying households using the platform on a regular basis, followed by cheaper, ad-supported accounts for low-income markets to kickstart its next growth cycle.
After a dizzying fall of over 74% since its peak in November, Netflix is now essentially a value stock trading at just under 3 times sales. The figures will improve across the board as its new monetization efforts start bearing fruit, and with $6 billion in cash, $17 billion in debt, and $540 million in cash flow, it has strong fundamentals to weather any storm that comes its way.
We believe Netflix to be a company for the future. The treatment the stock has received in the market these last six months is outrageous. Those of you that have Netflix, ask yourself this question: Do you have thoughts of canceling Netflix in the near future?
We have answered this question ourselves and the answer is NO WAY. How about this for a lineup: The Crown, Bridgerton, Ozark, Lupin, Stranger Things, Peaky Blinders, The Queen’s Gambit, and Outlander. We hope you get our point.
Our target price for the stock is aggressive at $500. It reached this level back in the summer of 2020, and then it went on to hit $700 in October of 2021. We fully expect it to reach our Target in 2023. We have no sell price.