The Long Case For Netflix (NASDAQ: NFLX)

“For a moment there I thought we were in trouble”. So said Butch Cassidy to the Sundance Kid, and so too said the management of streaming kingpin Netflix (NASDAQ: NFLX) recently as their shares crumbled after poor earnings. Or at least that’s what we think might have been said in the offices of their Silicon Valley headquarters. As Wall Street came to terms with slowing subscriber growth in the face of fierce streaming competition, shares of Netflix fell as much as 30% in a handful of sessions late last month. When taking the downtrend that started forming late last year into account, that meant they’d been cut in half since November when they were trading at all time highs. 

But the bears have quickly started to run out of steam in recent sessions, and there are more than a few reasons to think that Netflix is actually a buy right now. Let’s take a look at the reasons for and against. 

Growth Slowdown

For starters, the headline numbers on their Q4 earnings report weren’t bad. Their EPS print beat analyst expectations, while revenue came in as expected, showing year-on-year growth of about 16% while it was at it. Operating income was up 35% on the year and they were able to grow their global paid net subscribers from 8.28 million versus the 8.19 million that had been expected. But the devil was in the detail, and multiple red flags appeared as investors were briefed on what management is expecting in the months ahead. 

Netflix said it expects to add 2.5 million subscribers during the first quarter of this year, well below the 3.98 million it added in the same quarter last year, and even further below the 6.93 million analysts had been expecting. Stiff competition from the likes of Disney (NYSE: DIS) and Apple (NASDAQ: AAPL), who have both been rapidly expanding their streaming businesses, was blamed for the slowdown in growth. 

Netflix pointed this out to investors while also trying to come across as not being too concerned. They said that “consumers have always had many choices when it comes to their entertainment time - competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering. While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched.”

Understandably their shares had a violent reaction, but interestingly, they put in a low two days after the report and haven’t gone near it since. If anything, it could be said that there’s been a decent bid in Netflix stock in the past fortnight, as shares have tacked on as much as 30% since the last week of January. And before you think it’s just a dead cat bounce, consider the new voices that are joining the bull camp. 

Potential Upside

Earlier this week, the folks over at Citi upgraded their rating on Netflix to a Buy, with analyst Jason Bazinet noting that the enterprise value per subscriber analysis "suggests prevailing equity values don't assume material sub growth or improving subscriber economics beyond 2023." It was a bold step to take, as some of his peers in the likes of Keybanc had been quick to downgrade Netflix in the immediate aftermath of the report. 

But Bazinet thinks there’s some upside to be had here. So too does famous investor Bill Ackman, whose Pershing Square fund announced last week that they’d purchased more than 3 million shares since the report, equating to the guts of a $1.2 billion purchase cost. Ackman told his investors that this immediately made Pershing a top 20 shareholder in Netflix, and added that “the opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance". Ackman believes the fact that equities in general, and tech stocks in particular were selling off at the end of January exacerbated the negative reaction to Netflix. It’s not unreasonable to think then that as equities recover, so will Netflix shares. 

There’s a lot here for investors to chew on. While Netflix may be facing stiffer competition than it’s had to in the past, it’s still growing, and it’s starting to look like the recent drop has been overdone.