netflix (NASDAQ:NFLX) was bombarded after its fourth-quarter earnings report as forecasts fell well short of analysts’ expectations. The question is whether slowing growth is a red flag or whether selling is a buying opportunity.
In this episode of “Beat and Raise” recorded on January 20Fool contributors Jeremy Bowman and Brian Withers discuss Netflix’s recent earnings streak and what the market may be missing about the long-term picture.
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Brian Wither: Jeremy. I see waiting in the wings. Netflix is down. My stocks are down [laughs] 19 percent after hours. What is going on?
Jeremy Bowman: Yeah. Netflix is pretty tough. Their fourth quarter numbers were okay, but I think another case of guidance is the culprit. For the first quarter or the current quarter, margins are also expected to compress a bit in 2022. I’ll run my slides here. Fourth quarter numbers were pretty strong. Revenue rose 16% to $7.71 billion, in line with estimates.
Brian Wither: Can you put it in slideshow mode?
Jeremy Bowman: Yeah.
Brian Wither: Enlarge the text a little. Those with small screens appreciate it. [laughs].
Jeremy Bowman: Here we are. Earnings per share, which isn’t really the best number to value Netflix because a lot of different factors make it loud, but it was up 12% year over year. It’s also a GAAP number that beats estimates at around $0.83. Subscriber growth for the quarter was down slightly, was 8.5 million in the fourth quarter a year ago, so 8.3 million is still pretty good. I don’t think that’s a problem at all.
Brian Wither: For me, it’s amazing.
Jeremy Bowman: Yeah. To the right.
Brian Wither: This company has hundreds of millions of subscribers and continues to grow more than I ever imagined.
Jeremy Bowman: Yes sorry. I haven’t updated those quarters, so there’s the fourth quarter revenue, and then here we have the first quarter outlook. Management had requested 8.5 million for the quarter. According to the outlook for the first quarter, the company sees its revenue increase by only 10% to 7.9 billion. That’s about the worst revenue growth I think maybe in a decade since the Qwikster debacle for those of you who remember. I think you’re really starting to see Netflix lose its growth stock status if that’s all it can handle and likewise 2.5 million subscriber growth, especially down from 8.3 million, is quite disappointing. This is a company whose strongest quarters historically are Q4 and Q1, so you’d expect to see somewhat better numbers for that in Q1.
Highlights of the fourth quarter, it was a good quarter for new content, squid gamethe Korean dystopian show that swept the world, was the best TV show of the year, and then Netflix had its own most-watched movies with red notice and Don’t look up. These are good content gains for the business. He was also the leader in Emmy and Oscar nominations. As for results by region, I think the Asia-Pacific region is really the area to watch. This is the biggest growth for the company and it is also its smallest region in terms of subscribers, so it only has about 30 million subscribers. Adding 2.6 million new subscribers is pretty good for them. They said they were strong in Japan and India, which are very big markets.
It launched mobile games and is expanding it into 2022. I think that’s an interesting area to watch and it’s good that the company is making progress there. He said it’s about breakeven on a free cash flow basis in 2021 and will be positive in 2022. Concerns, I think the slowdown in revenue growth is most important. The company hasn’t commented on subscriber growth or revenue growth in 2022, but 10% isn’t ideal for Netflix. I think that explains why the stock is down almost 20%. He also said that the operating margin in 2022 will decline slightly after I think it was around 20, 21 points – something for 2021. They expect it to be slightly down and it blamed this in part on the stronger dollar, which makes its international earnings worth less.
But long-term, the company is aiming for an increase of three percentage points on average each year in its operating margin, so it’s a bit disappointing to see that moving in the wrong direction in 2022. They announced price increases to United States to come. I think that’s a reflection of slowing growth and trying to get more out of the mature subscriber base in the US, but you wonder how much pricing power they have left when it’s is just over a year after the last price hike, and then finally, the competition. Normally, this company has dismissed the competitive threat, but now admits it may have a modest impact on growth. I think it’s right. There have been a lot of changes in the streaming market over the last two years with a lot of new launches. Netflix, it looks like it’s gone from being disruptive to looking a bit still, and I think especially with these growth numbers, that’s what the market is reacting to right now.
Brian Wither: Yeah. It’s a shame because it’s a solid company and they continue to release great content. This Don’t look up the show was quite fun and starry. They had quite a few high talent actors in there. I think they continue to focus on international segments and get more local content for those regions. I think that will continue to be their success there, and they’re way ahead of everyone else in that region as a global streaming provider.
Jeremy Bowman: Yes, it’s a great deal. There’s no doubt about it, but I think the problem with growth is…
Brian Wither: It will be interesting, I imagine. Veehan said that for people who don’t own Netflix, is a 20% drop a good entry point? I guess, wait for the conference call, listen to the notes, and for anything else it will take some time for the course of action, I think to settle in and people feel comfortable with where it is. But Netflix is a solid company and I think a market beater over the next five years. Jeremy, do you feel the same?
Jeremy Bowman: I think they would outperform and I don’t think the stock deserves a 20% discount after today’s report. But I’d be interested to hear feedback from management and Reed Hastings is one of my favorites. I think he can put it into perspective.
Brian Withers has no position in the stocks mentioned. Jeremy Bowman owns Netflix. The Motley Fool owns and recommends Netflix. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.