I assign a Hold investment rating to Netflix, Inc. (NASDAQ:NFLX).
When it comes to Netflix's outlook this year, the key factors to watch out for include its line-up of new shows, the company's app download data, and changes to its subscription charges in international markets. Based on an analysis of these factors, I think Netflix can meet the market consensus' revenue expectations in 2022, but I don't see the company achieving substantial revenue beats. As such, I rate NFLX as a Hold.
How Did Netflix Stock Do In 2021?
Netflix's 2021 stock price performance was decent on an absolute basis, but this paled in comparison with that of the S&P 500. Last year, Netflix's shares rose by +15.2%, but this only represented about half of the S&P 500's +30.6% jump over the same period.
NFLX's Share Price Performance In 2021
Source: Seeking Alpha's Charting Data For Netflix
Netflix's relative share price underperformance is understandable, if one considers the company's slowing revenue expansion on a YoY basis. NFLX's YoY revenue growth has moderated from +27.6% in Q1 2020 to +24.2% in Q1 2021, while its Q2 2021 YoY top line expansion was +19.4% in Q2 2021 as compared with its Q2 2020 YoY revenue growth rate of +24.9%.
NFLX's Historical YoY Revenue Growth By Quarter
Source: Seeking Alpha's Earnings Data For Netflix
Even with the success of "Squid Game" (September 17 premiere), which was "the most-watched Netflix content of all time" according to a November 17, 2021 The Korea Herald article, NFLX's revenue growth further slowed from +22.7% YoY in Q3 2020 to +16.3% YoY in the most recent Q3 2021. In addition's Netflix's Q4 2021 guidance was also pretty modest, with its expected revenue of $7.71 billion and net subscriber additions of 8.5 million coming in +0.4% and +2.2% above market expectations.
In the subsequent section, I look at what Wall Street expects Netflix's share price performance to be like in 2022.
What Is NFLX Stock's Price Target?
The sell-side analysts appear to be divided on Netflix's stock price outlook in 2022, according to consensus price targets which are typically set with a timeframe of between six months to a year.
Based on Netflix's last traded share price of $541.06, the most bullish analyst expects the company's shares to appreciate by +48% with a target price of $800. In contrast, the most bearish sell-side analyst covering Netflix sees the company's stock price falling to $190, which translates to a potential downside of -65%. If we take the average of these target prices, the implied upside for NFLX is +20% based on the sell-side's mean consensus price target price of $649.07.
Wall Street Analysts' Target Prices For NFLX
Source: Seeking Alpha's Wall St. Analysts Rating Data For Netflix
In my opinion, Netflix's valuations are demanding, and it might be challenging for Netflix to even hit the average price target of $649.07 in a year's time.
NFLX trades at a premium to some of the other tech giants and streaming peers based on the forward Enterprise Value-to-Revenue valuation metric, despite boasting inferior expected revenue growth rates as compared to most of its peers.
Peer Valuation Comparison For Netflix
Stock Consensus Forward One-Year Enterprise Value-to-Revenue Multiple Consensus Forward Two-Year Enterprise Value-to-Revenue Multiple Consensus Forward One-Year Revenue Growth Rate Consensus Forward Two-Year Revenue Growth Rate Netflix 7.3 6.4 +14.7% +14.6% Meta Platforms, Inc. (FB) 6.1 5.0 +19.0% +17.7% Alphabet Inc. (GOOGL) 5.5 4.7 +17.2% +15.6% The Walt Disney Company (DIS) 3.9 3.4 +23.9% +11.2% Amazon.com, Inc. (AMZN) 2.9 2.4 +17.7% +17.3%
Source: S&P Capital IQ
Moreover, there is a risk that the tech sector as a whole might be suffering from valuation de-rating. Gene Munster from Loup Ventures had cautioned in a recent CNBC interview that "growth in 2022 will not be enough for most (Big Tech) companies to overcome the contracting valuations that traditionally come with rising interest rates", as per a December 27, 2021 Seeking Alpha news article. I agree with Gene Munster on the relatively high risk of valuation de-rating for Netflix and its tech peers in 2022, and I discuss about Netflix's financial outlook in the next section.
Netflix Stock Forecast For 2022
Year-to-date, NFLX's shares have continued to underperform the S&P 500 as per the chart below. Netflix's revenue growth in 2022 will determine how the company's shares will perform for the full-year, and I have a mixed outlook in that respect.
Netflix's 2022 Year-to-date Stock Price Performance
Source: Seeking Alpha's Charting Data For NFLX
As highlighted in the preceding section, the market consensus expects Netflix to register a +14.7% increase in revenue for fiscal 2022. I am not confident in NFLX's ability to achieve top line expansion that exceeds market expectations by a wide margin.
On the positive side of things, Netflix's solid 2022 content slate could help the company to reduce churn and retain subscribers. In the company's Q3 2021 Shareholder Letter, NFLX guided for "a more normalized content slate in 2022, with a greater number of originals in 2022 vs. 2021 and a release schedule that is more balanced over the course of the year, as compared to 2021."
It is also encouraging that Netflix's 2022 content slate includes season 4 of Ozark, season 2 of Raising Dion, season 3 of Too Hot To Handle, season 4 of Stranger Things, the prequel series for The Witcher, and Texas Chainsaw Massacre (new addition to the horror movie franchise). Returning series, sequels and prequels tend to have an existing loyal viewership base which should boost subscriber retention.
On the negative side of things, Netflix might find it difficult to drive stronger-than-expected new subscriber growth and ARPU (Average Revenue Per User) increases in 2022 and beyond.
I believe that there is an increasing number of consumers who are experiencing "subscription fatigue." Deloitte Australia's 2021 Media Consumer Survey published in September last year found that "the average household is spending 10% more on subscriptions than their target budget and 58% said they were concerned about the rising costs of multiple subscriptions." This is likely reflective of subscriber trends in other developed markets globally as well.
Notably, a January 6, 2022 Seeking Alpha news article cited JP Morgan's recent report which highlighted that "industry research suggests the company (Netflix) saw 'light [fourth quarter] download[s]' of programs", and the analyst decided to reduce his net new subscriber additions forecast for NFLX in Q4 2021 from 8.8 million to 6.25 million in view of this. This might be an indicator of "subscription fatigue" which I highlighted.
Separately, as Netflix expands further in international and emerging markets going forward, it is faced with another challenge. Although the runway for new subscriber growth is longer in these new markets, NFLX might have to accept lower ARPUs in exchange, as the purchasing power of consumers in certain foreign markets is lower. For example, Netflix had to cut the prices of its streaming services in India in December 2021.
In a nutshell, I expect a muted share price performance for NFLX in 2022, as the company could struggle to beat revenue growth expectations in a significant way this year.
Is NFLX Stock A Buy, Sell, Or Hold?
NFLX stock is a Hold for me.
Netflix's 2022 content slate seems sufficiently strong to support subscriber retention for the company this year. On the flip side, it is not easy for the company to generate significant revenue beats in 2022, considering subscription fatigue as evidenced by app download data, and the prospects of further price cuts in specific international markets. Considering both the positive and negative factors for the company's 2022 outlook, I view NFLX's shares as a Hold.
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