Investment Thesis
Netflix ( NFLX ) is a leading streaming company. However, now that it’s a quarter of a century old, it’s starting to mature. Nothing wrong with getting old. Very few businesses on the planet are superstars for more than 30 years.
The problem here has less to do with ageism and everything to do with the perception of getting mature.
Sentiment can be a wonderful driver of returns. But it cuts both ways. Author coverage of Netflix Even though, as you can see above, I was clearly bullish on this investment in the past, I have to admit that I didn’t see this coming. This now changes everything, here’s why: Netflix Is Not Immune To The Bear Market
Netflix after hours The bear market has been hitting small and medium cap tech companies for nearly a year. But the larger companies had been practically immune up until the last few weeks, as you can see here.
Investors had come to perceive that investing their capital into large-cap tech names was a safe haven. Well, evidently this is not. Revenue Growth Rates, A New Leaf
Netflix revenue growth rates, company guidance Netflix puts out its Q1 2022 guidance to grow its revenues by approximately 10% y/y. SA Premium tools Consider this, even if you make the case that Netflix is lowballing its guidance to allow for an easy beat next quarter, this nevertheless implies that analysts’ expectations were too high, see red arrow.
Netflix’s Q1 2022 revenue growth rates are the lowest they’ve been for a very long time. Investors won’t view this too kindly. Subscriber Number Slows Down, Is This A Big Deal? Yes, It Is!
For a long time, investors have clung to Netflix’s subscriber numbers as an indication of the company’s future prospects that when the number substantially slows down this has a huge impact.
On the one hand, this is clearly meaningful, as paying subscribers is what drives its revenues higher.
While on the other hand, the miss was relatively minor for the company to sell off by approximately 20% after hours. As a reminder, the figures for subscriber additions were 8.28 m illion compared with 8.50 million expected.
That being said, when investors and the analyst community have all been heavily indoctrinated to avoid focusing on the company’s ability to generate robust free cash flow but instead focused on subscriber growth numbers if you miss on that, there’s little else for investors to focus on. Netflix stock performance Moving on, this time last year, Netflix put up its stock performance for the first time. This was done to remind investors that Netflix has been an amazing stock and that anyone that came in over the past 3, 5, and 10 years, would have been amply rewarded. The message here? It pays to be patient.
As an investor myself, I am fully aware that it pays to be patient. But I also know, as do you, that Netflix’s strongest growth days are now in the rearview. Valuation – Difficult To Get Comfortable
When your strongest revenue growth days are in the rearview mirror, investors start looking ahead and start to compress the multiple that they are willing to pay for the stock.
And allow me to tell you something, multiple compression is arguably the worst thing for an investor. I can tell you this from personal experience.
No matter how cheap you think the stock is now, you have no idea how irrationally cheap the stock can become.
Here’s an example: Data by YCharts Buying fallen angels when the business is maturing can be bad for your wallet and is certainly bad for your health. Netflix free cash flow figures What’s more, as long as Netflix was reporting very strong growth figures, investors had been more than willing to embrace the fact that Netflix is just about breakeven.
Now, allow me to drive this point further home, the mantra of ”investing for growth” works for as long as the company is reporting revenue growth rates that offer compelling, sustainable, predictable, and close to ”certain” growth prospects.
However, when you are investing for growth and are barely generating any positive free cash flow, and your top-line growth rates are around mid-10s%, that’s a difficult situation to be in and ask investors to pay a premium for your stock.Along these lines, I’m not convinced that paying 5x this year’s revenues for Netflix, while it’s expected to grow around the mid-teens CAGR is attractive enough.Indeed, when there are countless tech companies that are growing substantially faster than this, and priced […]
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