During its history as a publicly traded company, netflix ( NFLX -3.52% ) treated its shareholders very well. Provided one had held the stock through all of its ups and downs over the years, a $1,000 investment at the time of the IPO would be worth $189,000 today. On the other hand, that same investment was worth over $500,000 at the end of 2021. And 2022 hasn’t been kind to the streaming leader.
Subscriber growth has been slowing for several quarters now, but this latest report sent stocks down more than 37%. It looks like Netflix’s time as a hypergrowth company is behind it, at least for the short term.
So what does this mean for the stock as an investment? Is it a good time to buy stocks at a deep discount? Let’s take a closer look.
The bad news
Netflix announced its first quarter 2022 results earlier this week. The letter to shareholders began with the phrase “Our revenue growth has slowed significantly,” which is not the opening line anyone wanted to see.
The thing is, revenue growth has been slowing for some time. In the first quarter of 2021, Netflix reported revenue growth of 24% year-over-year. It has fallen every quarter since, ending at just 9.8% in the first quarter of 2022. Management attributed this slower growth to its already high household penetration as well as high password sharing ( we’ll talk about that later).
What rattled shareholders even more was Netflix’s dismal subscriber count, where subscriber growth was 6.7% year-over-year. This ratio was significantly lower than the prior year quarter, when subscriber growth was 13.6%. What was more concerning was that for the first time in over a decade, Netflix actually lost members sequentially. The first quarter ended with 221.6 million subscribers, compared to 221.8 in the fourth quarter of 2021. Some of this loss was attributed to the impact in Russia and Ukraine, but it is clear that the competition heightened is finally starting to have a meaningful impact on Netflix.
reason to hope
There’s no candy about the bad parts of this report, but rumors of Netflix’s death may be greatly exaggerated. While investors should always take management comments with a grain of salt, Netflix sees two distinct growth opportunities.
Well over half of the homes in the world do not yet have broadband access, demonstrating the potential opportunity for Netflix to grow over time. Realizing that Netflix won’t be alone in trying to capture this market, the company has focused on creating content specifically for its international audience, rather than just exporting its domestic content. It will cost more in content creation, but if it’s a strategy that works, it could give Netflix an edge.
The second opportunity exists within the more than 100 million households that use another household’s account. Netflix had already tested two new paid sharing features in select Latin American markets to recoup some of that lost revenue. Netflix says that over time, growth in its average revenue per subscription (ARM), revenue, and watch time will become more important than growth in subscriptions. Time will tell if that’s true, and there’s always a chance that his efforts to monetize those sharing passwords won’t result in more paid subscriptions.
So is Netflix worth it?
It is likely that past returns to shareholders will not be repeated in the future. For those who own stocks, the level of pain is proportional to when those stocks were purchased. As mentioned, if you’ve owned it for decades, it’s always been a winning investment. For Netflix to be a winning investment for investors going forward, the company will need to regain its subscriber growth, either through international expansion or by cracking down on password sharing. It must also maintain positive free cash flow in 2022 and beyond.
For those who think Netflix can weather this tough time, the valuation is attractive. As of this writing, Netflix’s price-to-sales ratio is 3.2, the lowest since 2013. However, even at this valuation, it might be a good idea to find better places for your investment dollars, because the risk-reward ratio may not be worth it in the end.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.