Shares of streaming giant Netflix (NASDAQ: NFLX) are down by more than 30% in early market trading on April 20. NFLX stock is currently trading at $236 which is 67% below its all-time high, valuing the company at $105 billion by market cap. Let’s see how did Netflix perform in Q1 of 2022 and if it’s a good stock to buy right now.
Netflix misses revenue estimates in Q1
In Q1 of 2022, Netflix reported sales of $7.87 billion and adjusted earnings of $3.53 per share. Comparatively, analysts forecast the company to report sales of $7.87 billion and earnings of $2.90 per share in the quarter ended in March. In the year-ago period, Netflix reported revenue of $7.16 billion with adjusted earnings of $3.75 per share.
Netflix explained, “Our revenue growth has slowed considerably as our results and forecast below show. Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds.”
Netflix will aim to reaccelerate revenue growth through improvements in its service and effective monetization of multi-household sharing while maintaining an operating margin of 20%.
Netflix’s paid net additions in Q1 fell by 200,000 while the company forecast to add 2.5 million subscribers. Further, in the year-ago period, Netflix added four million subscribers. It attributed the suspension of its service in Russia and winding down of Russian paid memberships to the decline in subscriber growth. After accounting for Russia, paid net additions surged by 500,000 year over year.
What next for NFLX stock and investors?
In its quarterly shareholder letter, Netflix forecast paid net additions to fall by two million in Q2 compared to net additions of 1.5 million in the year-ago period. Its forecast assumes current trends to persist which include slow customer acquisition and an increase in competition from other streaming providers.
Netflix expects revenue in Q2 to increase by 10% year over year and it expects to end the year with an operating margin of 20%.
Despite its less than impressive quarterly results, Netflix said that broadband and smart TV penetration continues to gain pace globally with the increase of connected devices. Right now, more than 50% of the world’s broadband customers don’t have a Netflix subscription which represents a massive growth opportunity for the company.
Netflix is focused on reaccelerating its subscriber and revenue growth by improving the quality of its programming and recommendations. It will continue to allocate capital to create original content to acquire new customers while engaging existing ones.
There is a good chance for Netflix to begin an ad-supported subscription service for its lower-tier plans. As it continues to fight competition. Netflix has raised capital to create premium content allowing it to lead the streaming segment.
However, there is a point where subscription growth will stall as new companies enter this market with established content libraries. So, Netflix might be compelled to experiment with ad-supported services going forward.
Is Netflix stock a buy?
Analysts tracking Netflix expect sales to rise by 12.3% to $33.34 billion in 2022 and by 12.4% to $37.47 billion in 2023. Comparatively, its adjusted earnings per share are forecast to rise from $11.24 in 2021 to $14.17 in 2023. NFLX stock is valued at a forward price to sales multiple of 3.3x and a price to earnings multiple of 22.4x which is quite reasonable given its growth forecasts.
Netflix stock is available at a massive discount and might be a solid contrarian buy for investors at current prices.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
