Shares of Netflix (NASDAQ:NFLX) are down around 25% in pre-market trading today. The company reported disappointing results for January-March and investors sent the stock down to $258 a share.
Something similar happened after the company’s last earnings report. With the stock now a long way from its 52-week high of around $700, is it now time for me to buy Netflix?
What’s been going wrong?
The headline news is that Netflix reported disappointing subscriber numbers. Instead of adding 2.73m subscribers (as expected) the company lost 200,000. Worse still, the company forecast it would lose another 2m subscribers in the next three months.
Part of the losses were the result of the company’s decision to withdraw from Russia. But Netflix reported a reduced subscriber count in the US & Canada and Latin America, as well as in its Europe, Middle East, and Africa services.
Netflix CEO Reed Hastings attributed the disappointment to a number of causes. One is macroeconomic factors such as increased living costs. Another is increased competition from new streaming services from traditional television companies, as well as from Amazon, YouTube, Apple, and Disney.
In my view, the report wasn’t encouraging and the decline of Netflix stock is understandable. But I think that there are also some positives for shareholders to pay attention to.
Cause for optimism
It’s easy to spot the strengths in the earnings report. Three of them in particular stood out to me.
First of all, despite the decline in subscribers, Netflix posted higher revenues and operating income than in the first quarter of 2021. The company also forecast further earnings growth in the second quarter of 2022.
Furthermore, Reed Hastings noted several opportunities for growth. Most notably, the company suspects that it has around 100m viewers in addition to its 200m subscribers and is working on ways to monetise these users.
Lastly, the company also reported that it continues to do well in its production of new content. This is reflected in the fact that Netflix’s share of total US TV time actually increased in the last quarter. I think that quality content will be important for it going forward, so it’s encouraging to see it continuing to make progress in this area.
Conclusion: Netflix stock
A price of $258 per share values Netflix stock at 23 times earnings. This is much lower than the company’s historic valuation.
The real question for investors like me is how many of the headwinds Netflix is facing will prove to be temporary. I think that the macroeconomic situation will likely improve over time, but competition is unlikely to abate.
To my mind, there’s no question that the company’s stock is the best value that it’s been in years. I’m not currently a Netflix shareholder, but I’m thinking very seriously about making an investment at these prices. If I were a Netflix shareholder, I’d following Warren Buffett’s advice to be greedy when others are fearful.
