Netflix will report earnings on Tuesday after the closing bell. They’ll surely be hoping for a better response than the last quarter.
Even though the streaming service broadly met or surpassed analyst estimates, the outlook for subscriber growth disappointed. Netflix forecast a net addition of 2.5 million subscribers in Q1 2022, compared to 3.98 million during the first quarter of 2021.
The stock fell by >30% during the next three days…
Bill Ackman’s (Pershing Square) saw the dip as an opportunity to load up, stating:
“The opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance.”
“I have long admired Reed Hastings and the remarkable company he and his team have built. We are delighted that the market has presented us with this opportunity.”
In the letter, Ackman laid out the bull case for the company.
Netflix’s business has highly favourable characteristics which include:
- Subscription-based, highly recurring revenues, which have enormous future growth potential
- A truly best-in-class management team and unique high-performance culture
- Economies of scale and superb quality in its industry-leading content, which should continue to drive future growth and widen the company’s powerful competitive moat
- Pricing power derived from the enormous value it delivers to consumers compared with other alternatives
- Substantial margin expansion, with the opportunity for continued improvement due to economies of scale and the company’s rapidly growing, global subscriber base
- An improving free cash flow profile which should allow for continued investments in growth as well as the return of cash to shareholders
Clear and concise, although that pricing power is being put to the test now. Netflix increased all pricing plans in the US, Canada, UK & Ireland in March. It’s a bold move at a time when households are facing higher expenditure across the board.
Especially in the hypercompetitive market of streaming services. Recent analytics from Kantar showed that UK households cancelled streaming subscriptions in record numbers in the first quarter of the year. Approximately 1.5 million video-on-demand accounts got the chop.
Kantar reported that Britbox, Apple TV Plus and Discovery Plus had the highest churn rate, while Disney Plus had the biggest increase in churn rate, tripling from the previous quarter to 12%.
While the competition is struggling to entice subscribers to stay, Netflix and Amazon’s Prime Video had the lowest churn rates in the quarter.
Which perhaps suggests that as households are forced to choose, Netflix is one of few they are most likely to continue subscribing to, emphasising the competitive moat that Ackman highlights.
Subscriber additions is one of the crucial metrics that investors use to judge Netflix progress. That said, this is likely to be a noisy report, with writedowns from Russia also featuring heavily.
Heading into the report, Netflix is trading below the 2018 highs of ~$425, and struggling to pull away from the $330 area that marked the 2022 low so far.
WSJ Analyst price targets suggest that significant further downside would come as a surprise.
Analyst Stock Price Targets
High: $700
Median: $502.50
Low: $330
Current Price: $341.65
Not investment advice. Past performance does not guarantee or predict future performance.
