Is Netflix’s investment plot drifting towards unhappy ending?
In a year that has seen widespread selling of technology stocks and longtime market leaders falling into bear territory, the woes of Netflix stand alone.
Shares of the videostreaming company have plummeted 69% in 2022, abandoned by investors and analysts as back-to-back disappointing quarterly reports raised concerns about user trends in an industry that is becoming more competitive and losing its pandemicrelated tailwinds.
The drop is the most of any Nasdaq 100 or S&P 500 component, and much worse than the former index’s 26% decline.
The growth outlook has weakened to the point that Netflix has cut hundreds of jobs and changed its tune on two long-standing principles: it is cracking down on password sharing and will introduce an advert-based subscriber tier to the platform.
That’s on top of a backdrop where high inflation has pushed the US Federal Reserve to hike rates sharply, sparking recession fears and fuelling a rotation out of tech.
The challenges suggest it will be tough for Netflix to regain a valuation that exceeds that of Walt Disney as recently as December. Now, The Lion King parent is worth more than twice the home of Tiger King.
“We’ve seen a lot more competition, and the cost for Netflix to continue competing has gone up, which hurts the expectation that earnings were going to grow at aggressive rates for a long time,” said Jeremiah Buckley, who oversees nearly $48bn as a portfolio manager at Janus Henderson Investors.
Estimates for Netflix are moving in the wrong direction. The consensus for this year’s revenue now stands at $32.4bn, which though representing year-on-year growth of 9.2% is down from the $34.1bn that was expected at the beginning of the year, according to data compiled by Bloomberg. The consensus for adjusted earnings has declined about 16% over the same period.
The weakening growth outlook has led Wall Street to turn sour. At the start of 2022, more than 70% of analysts had Netflix as a buy. Now just about 30% do, with Goldman Sachs and Benchmark among the firms downgrading their opinions earlier in June. The consensus rating a proxy for the ratio of buy, hold and sell recommendations is at 3.35 out of 5, the lowest since 2014.
Yet the stock is getting ever cheaper. Netflix now trades at about 16 times estimated earnings, near the lowest since 2008 and a fraction of a 10-year average exceeding 80. Its drop in 2022 has been steep enough that the shares have joined the Russell 1000 value index following a rebalancing.
David Katz, chief investment officer at Matrix Asset Advisors, said investors “can at least make a case for Netflix” at current levels, though he remains sceptical about its prospects given the competitive backdrop.
“That’s why we’re not prepared to buy Netflix yet, even though that’s also considered a value name now,” Katz said. “It is statistically cheap, but we have more questions than answers.”