Netflix (NFLX)

Netflix (NFLX)

Is Netflix stock a good buy?

In this article, we review Netflix stock to determine if it’s a good buy, sell, or hold.

Netflix is a content platform and production company founded in 1997 and headquartered in Los Gatos, CA. Netflix is a B2C (Business to Consumer) subscription platform charging prices between $8.99 and $17.99 (USD) per month. Keep in mind, that prices may vary per country. Netflix has been known as a pure-play subscription platform. In other words, they have only generated revenue from subscribers which is a great market. As we discuss in this article, the competition is increasing which means their business model will be changing.

Tykr Rating

  • Summary: On Sale
  • Score: 13/20
  • MOS: 80%
  • Share Price: $198
  • Sticker Price: $997

The previous Tykr review on Netflix was completed on November 17, 2021. At that time the summary was as follows:

  • Summary: Watch
  • Score: 13/20
  • MOS: 29%
  • Share Price: $687
  • Sticker Price: $973

Netflix Share Price Plummets

The share price dropped by 35% on April 20th. As stated by cnbc.com, there are 4 reasons why.

  1. Increased competition, which we will look at in a moment.
  2. Password sharing, which we will also address.
  3. Inflation.
  4. Suspended services in Russia. 700,000 Netflix accounts were suspended in Russia.

When you take a closer look at the numbers, here is what happened.

  1. Good news: Q1 EPS was expected to be 2.92 and it was reported at 3.53. This shows the company’s profitability has increased.
  2. Bad news: Q1 Revenue was expected to be $7.94B and it was reported at $7.87B. This is a slight miss and shows the price decline of 35% is a bit extreme.
  3. Bad news: Q1 subscribers were expected to increase by 2.5M and they declined by 200K. Keep in mind, they lost 700K subscribers in Russia which means they still added 500K from around other parts of the world. Sure, they still missed the mark but they are still growing. Again, we have an overreaction with the share price drop.

Netflix Competition

Here is a comparison of Netflix subscriber volumes against the competition. 

  • Netflix: 214 million paid subscribers. 
  • Amazon: 175 million paid subscribers. 
  • Disney+: 129 million paid subscribers. 
  • HBO: 73 million paid subscribers. 
  • Hulu: 45 million paid subscribers. 
  • Apple TV+: 40 million paid subscribers. 
  • Paramount+: 29 million paid subscribers.
  • Showtime: 27 million paid subscribers.
  • Peacock: 9 million paid subscribers.

Here is how many countries stream Netflix in comparison to other platforms.

  • Amazon: 200 countries
  • Netflix: 190 countries
  • Apple TV+: 107 countries
  • Showtime: 60 countries
  • Peacock: 60 countries
  • HBO: 50 countries
  • Disney+: 35 countries
  • Paramount+: Approximately 10 countries
  • Hulu: 3 countries (US, Puerto Rico, and Japan)

Netflix is different from the competition because they are a global content-generating machine that not only produces unique content for US Citizens but also unique content for citizens within other countries. Some of those countries include but are not limited to the following.

  • US
  • Canada
  • Brazil
  • Argentina
  • Chile
  • Australia
  • India
  • South Korea
  • Japan
  • Mexico
  • Spain

Here is a comparison on the estimated content creating budgets in 2021.

  • Disney+:  $30B
  • Netflix:  $17B
  • Amazon:  $8.5B
  • Apple TV+:  $6B
  • Hulu:  $3B
  • HBO:  $2B

Disney is spending more money on original content which is a result of big-budget blockbusters such as Marvel films. For example, Marvel’s End Game had a production budget of around $400M. Although Disney may spend more on individual projects, Netflix is still the winner when it comes to volume. This article from variety.com states that Disney+ has over 7,500 TV episodes and 500 movies. Netflix on the other hand has over 47,000 TV episodes and 4,000 movies. 

Netflix News

This article from adweek.com states that Netflix will soon offer a free tier that includes advertising. By comparison, Hulu generated $2.1B in revenue in 2021 with 45 million subscribers. With Netflix sitting at 200+ million subscribers, does this mean they can generate over $8B in revenue on ads alone? That would certainly create a positive quarterly revenue report. This is a great sign but Netflix does not expect to add the advertising tier for another year. In other words, we can expect this tier to release in 2023.

This article from cnbc.com states that Netflix has a strategy to handle password sharing. More than 100 million households around the world are sharing a password with 30 million of those households being from the US and Canada. Netflix will charge about $2 – $3 more per shared account. In other words, if you share with 5 people, you can be charged up to an additional $15 per month. This strategy could also take up to a year to implement. This article goes on to mention they will have to approach this strategy delicately. There are circumstances where family members may be working/attending college in other cities temporarily, so handling individuals like that will be tricky. However, they did say they will address the “serial abusers” first which are individuals who are sharing their username and password with a higher number of individuals. They provided an example of someone who’s sharing with 15 households or more would be classified as an obvious abuser.

This article from nme.com states that Netflix will release up to 50 mobile games in 2022 including a Stranger Things series of games, Card Blast, Teeter Up, Shooter Hoops, and more. The games are expected to encourage long-term subscribers.

This article from barrons.com states that founder and co-CEO Reed Hastings bought $20M of stock on January 29th, 2022. This shows the high conviction he has on this stock. If CEO is doubling down, it is wise to pay close attention. 

This article from whats-on-netflix.com highlights the top viewed TV shows and movies on Netflix to date. Stranger Things Season 3 broke records at the time of release in 2019. The highly anticipated release of Stranger Things Season 4, arriving in May of 2022, will most definitely see massive viewership and new subscribers to the platform. In fact, those who previously left Netflix will most likely return. Those who sold the stock were clearly not looking at the content calendar.

This article from variety.com states that Bill Ackman’s hedge fund, Pershing Square Holdings, sold its entire Netflix stake for a loss of $400M. I’m paraphrasing his quote but he says something along the lines of “The change to an advertising model is sensible but difficult to predict long-term subscriber growth and future revenues. We have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty”. I have to mention that Akman’s firm has performed fairly well through the years. Since Pershing Square Holdings was founded in 2003, the firm has returned an average of 16.9% per year which beats the market. Although the returns are great, he’s had some serious misses including a $3B loss on Valeant Pharamceuticals. Personally, I avoid pharma stocks because government regulations can cause these stocks to rise and fall regardless of the financials. Pharma is way too risky. He also lost hundreds of millions of dollars on Borders Group in 2011, a competitive bookseller to Amazon. By 2010, it was relatively obvious that Amazon had cornered the market with online book sales. This was also a risky move I’m surprised he made. He also betted against Herbalife, a multi-level marketing company. I highly recommend the documentary Betting on Zero which shares the story. This is a move I supported as I can’t get behind MLM’s. In this circumstance, I was hoping he came out on top but unfortunately he lost about $1B on this stock. Overall, Ackman and his firm have built solid portfolios and generated better than average returns but some choices have been questionable. Regarding him selling Netflix at a loss of $400M, I don’t think that was a good choice.

Netflix 4M’s

Now let’s take a look at the 4 M’s. A wise investor should always look past the numbers and look at the business.

MOS: When the share price dropped by 35% but the EPS didn’t, this means the MOS greatly increased from 29% up to 80%, showing a lot of upside potential. Since the most recent earnings report the score did not change as it remained at 13%. This goes to show the 35% decline was an extreme reaction. A 10% – 15% decline would be more appropriate. Overall, the financials still look strong.

Meaning: A negative earnings report followed by a drastic share price decline is sometimes exactly what’s needed to force a company to change. In other words, this is a good sign. Netflix needs to add additional streams of revenue. They need to think like Microsoft and Google if they want to see their share price recover. A healthy tech company has more than one stream of cash flow. With Netflix, a subscription + advertising + video games + upcharges for sharing passwords are all steps in the right direction. 

Moat: We know the threat from Amazon, Disney, Apple, and HBO will continue to grow. Netlix needs to continue producing great content in other countries. The subscriber count may be slowing but that’s okay. Hulu’s advertising revenue has proven to be highly profitable which means Netflix can capitalize on the same strategy. Turn the revenue generation away from the consumer and place it on other corporations. This is a smart play.

Management: Ted Sarandos, who was hired by Reed Hastings in 1999, was named co-CEO of Netflix in 2020. Sarandos has been head of content for decades and will continue to serve in that role while Hastings leads strategy and technology. When I look at the two distinct roles, I think Sarnados needs to keep doing what he’s been doing. Netflix has done a great job producing global content. I think the real pressure falls on Hastings. Netflix has a timeline of about one year to introduce advertising as well as password sharing fees. If I were him, I would work on ways to shorten that timeline. Investors need to see some positive movements on these fronts to avoid a further share price decline.

Netflix Financials

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

  • 2018:  $15.7B
  • 2019:  $20.1B
  • 2020:  $24.9B
  • 2021:  $29.6B
  • Revenue has consistently increased year over year which is a great sign.

Net Income (Found on the Income Statement)

  • 2018:  $1.2B
  • 2019:  $1.8B
  • 2020:  $2.7B
  • 2021:  $5.1B
  • Net Income has increased year over year which is a great sign.

EPS (Found on the Income Statement)

  • 2018:  2.78
  • 2019:  4.26
  • 2020:  6.26
  • 2021:  11.55
  • EPS has increased year over year which is a great sign.

Free Cash Flow (Found on the Cash Flow Statement)

  • 2018:  -$2.8B
  • 2019:  -$3.1B
  • 2020:  $1.9B
  • 2021:  -$131M
  • Free Cash Flow significantly declined in 2021. We can see the numbers were much further in the negative in 2019 and 2018 so this is not terribly alarming but it’s worth keeping an eye on. The lower free cash flow is most likely caused by production budgets for new content.

Total Assets (Found on the Balance Sheet)

  • 2018:  $25B
  • 2019:  $33B
  • 2020:  $39B
  • 2021:  $44B
  • Total Assets have consistently increased which is another great sign.

Total Liabilities (Found on the Balance Sheet)

  • 2018:  $20.7B
  • 2019:  $26.3B
  • 2020:  $28.2B
  • 2021:  $28.7B
  • Total Liabilities have slightly increased which is okay. In comparison, the Assets have increased more than the Liabilities which is exactly what we want to see.

Total Debt (Found on the Balance Sheet)

  • 2018:  $10.3B
  • 2019:  $14.7B
  • 2020:  $16.3B
  • 2021:  $15.3B
  • Total Debt has slightly decreased since 2020 which is a good sign.

Total Equity (Found on the Balance Sheet)

  • 2018:  $5.2B
  • 2019:  $7.5B
  • 2020:  $11.0B
  • 2021:  $15.8B
  • Total Equity has increased year over year which is a great sign.

In summary, is Netflix stock a good buy?

Although Netflix has seen a significant share price decline, this does not mean you should be running from this stock. To recap the 4Ms, the MOS still looks fantastic. The revenues did slightly decline in the most recent quarter but their revenues have greatly increased over the last year. Regarding the meaning, I’m very pleased to see that Netflix will expand from one revenue model (subscription) to four revenue models by adding advertising, video games, and password sharing fees. Regarding the moat, that is the challenge. The market has become saturated but that’s okay. Netflix is still the top global content powerhouse. In other words, Netflix can expand to other countries. They proved great success with non-English originals such as the record-breaking first season of Squid Game which generated 142 million views. To compare, the top US-based show on Netflix is Bridgerton with 82 million views, The Witcher is at 76 million views, and Stranger Things S3 is at 64 million views. Regarding the management, Sarandos needs to keep up the good work while Hastings needs to speed up the timelines on advertising and password sharing fees.

If I were a shareholder, I would keep holding this stock. I wouldn’t stockpile yet until we see a positive quarterly statement. This proves the new revenue models are working.

If you are not a shareholder, I would wait for the next positive quarterly statement. 

Overall, keep this one on your watchlist. Let’s see how this plays out over the next 3 – 12 months. 

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.