Netflix (NASDAQ:NFLX) is indisputably the “King of Content.” With 222 million paid membership subscribers, the streaming giant had an exciting 2021 after being the most Oscar-winning studio of the year. So NFLX stock has justifiably been a long-standing Wall Street darling. The Silicon Valley based company that now houses more than 12,000 employees, has returned a staggering total of around 32,000% since its initial public offering (IPO), back in 2002. That’s around $320,000 for every $1,000 invested. Nonetheless, despite the wall street celebrity status, NFLX stock is currently down 16.6% year-to-date (YTD).
The overall market for the streaming and home entertainment industry has been steadily expanding for the past decade. Investors have been accustomed to use metrics such as subscriber growth to measure stock performance rather than other key financial highlights.
NFLX Stock Financial Analysis
NFLX stock price currently hovers around $400, severely down from the $700 intra-day all-time high (ATH) back in November 2021. Market capitalization is presently around $190 billion, a steep decline from the recent $306 billion.
Q4 2021 revenue was $7.7 billion, 16% higher compared to $6.64 billion for Q4 2020 and higher than all three previous quarters. Operating income is $632 million, less than half the amount in the previous three quarters. Netflix expects to return back to $1.7 billion in the current quarter, Q1 2022.
There was also a net income decline for NFLX stock from $1.45 billion in Q3 2021 to $607 million in Q4 2021.
Free cash flow (FCF) saw a further push into negative territories, from -$284 million in Q2 2021 to -$569.2 million for Q4 2021. Additionally, the company invested an overwhelming $17.7 billion for content creation in 2021, compared to $11.7 billion from 2020.
In 2021, Netflix added around 18 million paid subscribers vs 37 million in 2020. For Q4 2021, the company added 8.3 million paid subscribers vs 8.5 forecasted. Netflix announced that it expect to add 2.5 million subscribers in Q1 2022 – significantly less compared to 4 million for Q1 2021.
Revenue wise, the latest Q4 2021 earnings was in line with analyst expectations. Nevertheless, the slowing pace of subscriber growth compared to previous years, has caused investors worry and shares to plunge for the entertainment streaming platform. Investors have taken negative FCF and decreasing subscriber growth into strong consideration.
Distinguished hedge fund activist Bill Ackman bought the NFLX stock dip a few days after Q4 2021 earnings. Ackman announced a bullish long position in Netflix with 3.1 million shares worth in excess of $1 billion. Reed Hastings, the Netflix co-CEO has also purchased 50,000 shares worth $20 million, showing strong conviction in his company.
Ackman, who owns Pershing Square Capital, is a long-term value investor who is actively engaged in operational efficiency, in order to increase operating margins and maximize profits. He is expected to positively affect the stock performance of the company in the short to medium term.
Netflix had a tremendous year in 2021, as it released two of its most watched movies ever and average revenue per membership (ARM) has grown 7% year over year (YoY). And let’s be honest, if Netflix thought it was truly losing ground, it wouldn’t have increased prices for U.S. and Canada.
NFLX stock has a tested and proven business model that has a subscription based reoccurring revenue with substantial growth potential, an all-star management and leadership team, good margins and economies of scale potential and a fascinating user interface and algorithmic ranking. Total Addressable Market (TAM) is estimated at 800m to 900m users, and Netflix estimates just 25% achieved penetration.
Wall Street Journal has the NFLX stock average price target at $517.44, a 29% increase from current trading levels.
The multilayered chart below depicts key points for NFLX stock for the past five years. It includes competitors such as Viacom (NASDAQ:VIAC), Disney (NASDAQ:DIS), Comcast (NASDAQ:CMCSA) and ROKU(NASDAQ:ROKU) along with the Nasdaq 100 Benchmark (NDX).
The Bad and the Ugly
NFLX stock has had a phenomenal rally for the past decade, but it is now at a point where the stock has “eaten” most of its first mover’s advantage. Netflix is facing structural changes, strong competition and massive pools of invested capital to ensure superior content quality to meet high expectation demand from “greedy” consumers.
Netflix has spent a whopping $17 billion in 2021 alone for content. But despite the big splash, there is a divergence between money invested for content creation and the number of new subscribers, which is a key performance indicator for investors.
There are a lot of questions. Is NFLX stock migrating from a growth stock to a slower, more established corporation? Is $17.7 billion spending for content creation enough to bring more subscribers? Or will the company keep burning cash to retain existing customers? Does NFLX stock have to find new revenue streams?
NFLX Stock Finale
Netflix is an innovator with exceptional products and services. I am confident the stock is undervalued at the moment, due to unfair analyst reaction regarding subscription slowdown. The ultimate time to buy is when there is fear in the markets, and now seems the right time to buy Netflix.
If we consider that Netflix can manage to control its production budget and double subscribers to 444 million by 2030 at $14 per month, revenues could easily hit $60 billion-$70 billion. Add gaming and other revenue streams to that and, with 20% margins on those figures, its market cap could almost double to $400 billion.
On the date of publication, Jonathan Tang held a LONG position in NFLX stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jonathan Tang has gained extensive experience in the financial services industry in London. He has completed valuable projects for companies such as Bloomberg, London Stock Exchange Group and FactSet. He holds a master’s degree in Investment & Risk Finance and has completed an MBA course at the London School of Economics. Jonathan has a passion for fintechs that democratize investing, stock market and public equities, ETFs, start-ups and real estate.