Netflix Inc. on Jan. 20 will report fourth-quarter 2021 earnings, and investor sentiment has rarely been as dour.
While some analysts still believe Netflix can shake off the naysayers and generate growth amid the highly competitive shift from traditional TV to streaming video, other analysts and many investors increasingly believe the company is overvalued.
The streaming platform shed 6.2% of its market capital for the five trading days ending Jan. 13 to close at $519.20. It has been a rough week on the market, particularly for technology stocks, but the Nasdaq still only gave up 1.8% over that timeframe and the S&P 500 lost just 0.8%. The full-year picture as of Jan. 12 is not much stronger, with Netflix's gain of almost 9% comparing unfavorably to a 24% gain for the S&P 500.
Subscriber growth
One major concern for investors is slowing subscriber growth in higher-income markets.
"They're reaching saturation in North America. They're going to continue to be the first choice and the staple streaming app, but they've already penetrated all of the median- and higher-income North Americans, and the lower quality subscribers are going to be the ones that churn in and out when they have something specific they want to watch," Wedbush Securities analyst Alicia Reese said in an interview.
Recent survey data compiled by Kagan, a research group within S&P Global Market Intelligence, supports Reese's concern that lower-income households will be more apt to churn out of Netflix on a month-to-month basis, Kagan analyst Seth Shafer said in an interview. About 60% of respondents said they consider their monthly budget when deciding which streaming services to keep or which to cancel, an impact that could be felt more acutely amid inflation.
MoffettNathanson analyst Michael Nathanson expects that Netflix added about 550,000 U.S. and Canada subscribers in the fourth quarter of 2021.
"We think that the fourth quarter of 2021 will show that two of the newer entrants — Peacock and Paramount+ — will post the most net additions in the U.S.," Nathanson said in a Jan. 13 research note. Peacock is owned by Comcast Corp., while Paramount+ is owned by ViacomCBS Inc.
Nathanson expects Netflix to achieve its previous guidance calling for a global membership gain of 8.5 million for the fourth quarter of 2021. Specifically, he expects adds of 8.6 million, with the majority of those new subscribers coming from the Asia-Pacific and Latin America regions, which carry lower membership fees and generate less revenue for Netflix.
Evaluating valuations
"The equity market will focus on Netflix's relatively high valuation and the longer-term implications of hitting a subscriber ceiling in their most valuable regions of the world," Nathanson said.
Kagan's Shafer acknowledged the difficulty of valuing Netflix's stock right now. While subscriber growth in higher-income markets may be slowing, the streaming market is still nascent as consumers digest a broad shift from traditional pay TV to streaming.
"I'm glad I'm not an equity analyst when companies are at the crux of a bigger consumer shift like that," the industry analyst said. "There's not a really good peer. Who do you look at to value an Amazon.com Inc.] or Netflix."
The bear case for Netflix and the recent selloff in stock is countered by the fact that a majority of analysts maintain their bull position on Netflix. The company still carries more "buy" or "outperform" ratings than not, based on a quantified average of 42 analysts compiled by S&P Global Market Intelligence.
Shafer, Reese and Nathanson admit that Netflix will remain a dominant player as streaming video grows to into the home entertainment market historically dominated by traditional TV.