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Is the Show Over for Netflix?

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One company that benefitted majorly from the stay-at-home orders and a world that had been shut down during the early phases of the pandemic was the all-mighty streaming giant Netflix (NFLX - Free Report) .

Once widely hailed and an investors’ favorite in many portfolios, the tide has shifted significantly for the company throughout 2022.

The chart below shows the performance of Netflix shares over the last five years while blending in the S&P 500 for comparison.

Zacks Investment Research
Image Source: Zacks Investment Research

As seen, Netflix was once a stellar investment that was undoubtedly a staple in many portfolios. Beginning in late 2021, shares took on a steep downwards trajectory, plummeting and losing an immense amount of value.

Below is a year-to-date chart of Netflix shares.

Zacks Investment Research
Image Source: Zacks Investment Research

One word perfectly describes that chart – meltdown. So, what exactly caused this spiral? Is the company still worth your hard-earned cash? Let’s take a look.

Rising Competition

Online streaming services have popped up left and right over the last several years, undoubtedly a significant part of the “digital shift” we have undergone.

A few of these streaming services include Amazon (AMZN - Free Report) Prime Video, Apple (AAPL - Free Report) TV, Roku (ROKU - Free Report) , and Disney+ (DIS - Free Report) . All of these services have been pushing boundaries, making the industry much more competitive. Simply put, Netflix is no longer the go-to streaming service it used to be.

For example, Netflix used to stream several blockbuster Marvel movies, such as Infinity War and Thor: Ragnarok. Since Disney+ has hit the scene, NFLX has lost access to these beloved movies, undoubtedly causing a shift in sentiment. This is just one example of the company losing ground to its competitors.

Additionally, coming into Disney’s latest quarterly report, many believed that since NFLX lost subscribers throughout the quarter, Disney must also have.

This turned out to be a significant misconception, as Disney boasted strong net subscriber adds for the quarter, capturing 7.9 million subscribers vs. the 4.5 million expected. Additionally, Disney+ remains on track to achieve its guidance of 230 – 260 million paid subscribers by the end of FY24, which would overtake NFLX in total subscribers.

Subscriber Growth Slowdown

Of course, subscriber count is king for the streaming giant. The unfortunate news is that things have recently taken a turn for the worst in this area.

In 2021 Q4, the company provided disappointing guidance that it expected new subscriber adds of 2.5 million in 2022 Q1, well below the consensus of seven million expected.

Fast-forward to 2022 Q1, and the company reported that it had lost more than 200,000 subscribers in the quarter; NFLX then provided disheartening guidance again that it was expecting another drop of two million subscribers for the upcoming quarter.

The disappointing guidance threw fuel on the fire, with NFLX shares plummeting 35% following the 2022 Q1 earnings report. Simply put, the market priced in the growth slowdown, and the downwards trajectory that shares were on continued.

Current Valuation & Forecasts

Not all is negative, however. After the sell-off, Netflix now sports much more reasonable valuation levels – a major positive for potential investors. Its forward 12-month P/E ratio of 15.6X is an absolute fraction of 2018 highs of 161.8X and nowhere near its five-year median of 61.1X.

NFLX currently has a Value Style Score of a B.

Zacks Investment Research
Image Source: Zacks Investment Research

Analysts have dialed back their earnings estimates across the board over the last 60 days, with a 100% revision agreement percentage. The $2.95 EPS estimate for the upcoming quarter reflects a marginal 0.7% decrease in earnings from the year-ago quarter. Additionally, FY22 earnings are expected to slide nearly 3% but are forecasted to climb 10% in FY23.

Zacks Investment Research
Image Source: Zacks Investment Research

Top-line forecasts appear solid, with the $32.5 billion revenue estimate for FY22 displaying a notable 9% increase year-over-year. Furthermore, in FY23, revenue is expected to climb an additional 9.1% to $35.4 billion.

Netflix’s Solutions

The company has turned to a solution to turn things around – advertisements. As of now, NFLX doesn’t run any advertisements within its streaming services, and it’s one of the big reasons why the streaming giant has become so popular.

After all, nobody likes ads in the middle of their favorite shows and movies.

In a quick turn of events, Netflix has been open and has plans for an ad-based tier within its streaming service. It’s important to note that the ad-based tier will be cheaper and is something that felt inevitable from the start.

Consumers have been increasingly becoming frustrated with the constant price hikes NFLX has deployed, and this will no doubt alleviate that issue. Previously, NFLX primarily used its pricing power to increase revenue, something many would call a double-edged sword – Netflix makes more money off higher subscription costs but also runs the risk of losing subscribers who refuse to pay more.

Bottom Line

All in all, it’s been a very rough stretch for the once-beloved stock. Known for generating immense gains, that story has quickly turned south in 2022.

Currently, Netflix’s valuation levels are much more reasonable, and an ad-based tier will undoubtedly help propel the top line. In the near term, I think investors should keep their distance from this stock but also keep an eye out for quarterly results.

If subscribers start piling back in, it’s game on for Netflix. At the current moment, however, it seems to be a losing battle, further displayed by its Zacks Rank #4 (Sell).

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