Netflix (NASDAQ: NFLX) released its fourth-quarter financials for 2021 on Thursday, January 20, after the close of market hours. On Friday, its stock plunged over 20%. The company didn’t meet analyst expectations and its outlook for Q1 of 2022 said it expects a slowdown in subscriber growth. Netflix’s Q4 numbers had more misses than hits. However, was the plunge an overreaction, and does the drop make Netflix a smart buy?
The markets are in correction mode and a lot of COVID-19 winners like Peloton and Zoom have seen stock prices take a hit as markets believe their products will no longer be consumed as the pandemic recedes. The same logic has been applied to Netflix stock as well which has now lost 45% from all-time highs.
Key Financial Numbers
Netflix added 8.28 million global paid net subscribers in Q4 of 2021 mostly driven by growth outside of the North American market. This was higher than Wall Street estimates that pegged subscriber growth at 8.19 million.
However, it was less than 8.5 million subscribers that Netflix added in Q4 2020. But what really crushed NFLX stock was that the company now expects to add only 2.5 million subscribers in Q1 of 2022. This is massively lower than the 6.93 million subscribers that the markets expected, according to CNBC. For context, Netflix added 3.98 million subscribers in Q1 2021.
Netflix’s global paid streaming memberships increased 8.9% year-over-year in Q4 and this was the second slowest pace of growth observed in the past fourteen quarters. The increased competition in the market with rivals like Apple TV (NASDAQ: AAPL), Disney+ (NYSE: DIS), or Amazon Prime Video (NASDAQ: AMZN) has made it quite difficult for Netflix to attract new subscribers and the company feels this factor is affecting its marginal growth to some extent. Therefore, now it has to spend more on enhancing its content quality which in turn will impact its operating margins.
Revenue for Q4 was $7.71 billion, a 16% year-over-year growth with a 7% year-over-year increase in average revenue per Membership (ARM). The last time such low revenue growth was noticed in the company’s earnings was four years ago.
Netflix had negative free cash flows amounting to $569 million in Q4 and this was the third consecutive quarter where the company reported a negative free cash flow.
Is it all bad for NFLX stock investors?
Netflix delivered a large number of big hits in 2021 including Squid Game which was released by the end of the third quarter. It broke global records and generated 1.65 billion viewed hours within the first four weeks of release and now is one of its biggest TV shows on the planet.
Netflix accounted for six out of the 10 most searched shows globally while its films represented two of the top 10. In November, Netflix debuted its mobile games experience globally on Android and iOS. With this members will now be able to discover and launch games from within the Netflix mobile app. Besides, in 2021 it has launched a total of ten games.
Netflix is growing. However, markets are complaining that it is not growing fast enough. It has 222 million paying customers, among the highest for streaming services worldwide. And more importantly, the company doesn’t shy away from the hard talk. CEO Reed Hastings was candid enough to admit that its lack of success in India, one of its biggest potential growth markets, was “frustrating”.
It is possible that these results mark the end of Netflix’s ‘rapid growth phase’. The company will continue to grow, just not at the same speed it has been growing for the last 10 years. This means it will keep adding new content and new subscribers, making NFLX a buy. It is also possible that Netflix’s stock plunge is merely the precursor to a broader market correction. If that happens, it is possible that Netflix’s price will fall further. I would say, it’s time to keep cash handy to buy more Netflix stock.