The tumble in Netflix (NASDAQ:NFLX) stock after its fourth-quarter 2021 earnings report on Jan. 21 was overdone. Now NFLX stock looks too cheap. It has rebounded from its trough price of $366.22 on Jan. 26 to more than $400 on Feb. 3. But it still has a good deal more to go.
In short, people aren’t going to stop watching Netflix anytime soon. Moreover, the company is raising its prices again, and that should help with what is bothering analysts.
As a result, the market is overlooking the company’s huge profitability, even though it fell during Q4. This seems to indicate NFLX stock is oversold.
What Is Bothering the Market
Investors seem to be worried about what Netflix said about its growth rates. For example, the company forecast just $7.9 billion in revenue for Q1 2022, just 10.3% over last year.
Moreover, as the New York Times Dealbook points out, the market is concerned that Netflix said its membership growth is about to slow:
“Rivals are eating into Netflix’s business. The company, which now has 222 million subscribers, forecast that it would gain only 2.5 million customers in the current quarter, far from analysts’ average estimate of just over 6 million. Competition from the likes of Disney+, Amazon Prime Video, HBO Max and others “has only intensified over the last 24 months,” Netflix said.“
In addition, the market seems worried about the dip in Netflix’s operating earnings during Q4. This can be seen in the table the company provided in its shareholder letter:
Click to Enlarge
This shows the operating margin fell from 14.4% a year ago to just 8.2% this past quarter. That is a huge decline of 6.2% of sales in the Q4 2021 quarter compared to a year ago.
Moreover, its free cash flow (FCF), which is highlighted in yellow in the table above, turned negative at $403 million, versus a positive $82 million in Q3.
However, there seems to be a pretty good explanation for this downturn in operating profit and FCF. Management told shareholders in its letter that its “large content slate” spend hit its profits and cash flow.
In other words, they are spending money making movies and series like Ozark. (By the way, its third season is now out and is completely addicting.)
Moreover, Netflix said it did a better job than it previously forecast since it had already warned Q4 operating margins would be down to 6.5%. They came in better than budget at 8.2%.
Where Analysts Stand on Netflix Stock
Analysts are still quite positive on NFLX stock despite the recent selloff. For example, TipRanks reports 36 analysts have written on the company in the last three months. It turns out their average price target as a group is still 28.5% higher than today at an average of $521.21 per share.
The same is true at Seeking Alpha and Yahoo! Finance. For example, Seeking Alpha says 44 analysts have an average price target of $509.84, or 25.7% over its Feb. 3 price of $405.60.
Yahoo! Finance, which uses Refintiv’s analyst survey data, says 38 analysts had an average target of $538.24 per share as of Feb. 3, or 32.8% over its price that day.
Citigroup’s analysts reported the market was not looking far enough into the future to measure potential subscriber growth, according to Barron’s. The point is market analysts don’t assume material subscription growth or improving economics beyond 2023.
But they should, according to Citigroup. For one, it has “ample pricing power.” That will help keep revenue growing in case of slower sub growth. In fact, Netflix just raised its prices this month.
What to Do With NFLX Stock
The patient investor will take the long view on NFLX stock. Most analysts seem to believe it’s worth between 25% to 33% more than today.
As a result, the price today for Netflix looks like a pretty good opportunity to average down into the stock. This will help lower the average cost of the investment and set it up for a higher return in the future.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
