Netflix second-quarter results

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Netflix’s shares are down 70% in 2022 and are down by more than three-quarters from their autumn 2021 highs after a stunning fall from grace for a perceived winner during the pandemic and lockdowns,” says AJ Bell Investment Director Russ Mould.

“The combination of increased competition and consumers’ cutting back on discretionary spending as higher bills, fuel and energy costs hit home is partly to blame, alongside tighter control of household password sharing. Although the share price fall also owes a lot to the very lofty valuation afforded the stock during the pandemic. The desire to pay pretty much anything for growth stocks has dissipated, in the face of two warnings on subscriber growth and higher interest rates (usually a negative for long-term growth stocks, as higher discount rates lower the long-term value of future cashflows and thus the theoretical value of the equity).

“Netflix stunned the market in April by announcing it has lost 203,000 subscribers in Q1 and then predicting it would shed another two million in Q2.

“Subscriber additions are therefore the first place that investors and analysts will look, especially if co-chief executive Reed Hastings makes any forecasts for Q3 and beyond. How Netflix manages what it estimates to be 100 million households that are sharing passwords, over and above its 222 million paying household subscribers, will be particularly interesting.

Netflix second-quarter results:  

Source: Company accounts, management guidance for Q2 alongside Q1 2022 results in April

“Alongside the Q1 results, Mr Hastings still forecast 10% sales growth on a year-on-year basis for Q2, assuming no major currency movements and mid-to-high single digit percentage gains in average revenue per member (in other words, price increases). Dollar strength could crimp that number a little but analysts are looking for sales of $8 billion against $7.3 billion in Q2 2021. If Netflix gives any guidance for Q3, the current consensus is $8.1 billion, up from $7.5 billion in Q3 2021.

“Despite the slow start to the year in terms of subscriber additions, Netflix still forecast a full-year operating margin of 19% to 20%, again assuming no major currency movements.

“The next headline number will be earnings per share (EPS). Analysts are looking for EPS of $2.91, a fraction below the Q2 2021 figure of $2.97. If Netflix gives any detailed guidance for Q3, the current analysts’ EPS forecast is $2.72 (down from $3.19 in the same period a year ago).

Netflix second-quarter results:

Source: Company accounts, Zack’s, NASDAQ, consensus analysts’ forecasts

“All of that means full-year EPS is expected to come in almost exactly flat at $10.75 versus $10.74 in 2021, although analysts have pencilled in a return to growth for 2023, when EPS is seen reaching $11.79.

Netflix second-quarter results:

Source: Company accounts, Zack’s, NASDAQ, consensus analysts’ forecasts

“If those figures are met, then Netflix now trades on 17 times earnings for 2021 and barely 15.6 times for 2023, both discount ratings relative to the S&P 500. This is a massive contrast to the huge premium ratings attributed to the stock during lockdowns. When Netflix’s market capitalisation peaked at around $300 billion, the shares were trading on around sixty times forward earnings forecasts (forecasts which will now not be met, at least this year).

“It will be interesting to see if any contrarians start to argue there may be some value here now – especially if Netflix can win fresh subscribers or boost revenues through advertising (or at least carefully constructed packages with or without ads). However, some may still decide the balance sheet makes the stock a risky proposition.

“On top of the $14.5 billion of debt on the balance sheet, partially offset by $6 billion in cash (for a net debt position of $8.5 billion), Netflix has on-balance sheet content-related liabilities of $7.4 billion and off balance sheet content related liabilities of a further $15.8 billion. Of those, $9.9 billion is due this year and another $9.1 billion in between one and three years’ time. Netflix’s balance sheet means it is committed to rapid future growth, which slowing subscriber additions mean could be hard to achieve.”

Netflix second-quarter results:

Source: Company accounts

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.