Overview of Netflix (NFLX) earnings release for the 1st quarter of their 2022 fiscal year
Category: Netflix (NFLX)
Date: 20 April 2022 Stock Price of Netflix: $348.61 Should you buy Netflix (NFLX) stock right now? Read the article below and decide for yourself.
We take a look at the 1st quarter earnings release of their 2022 fiscal year of Netflix, the world's leading internet entertainment service group with over 221.6 million paid memberships (down by 200 000 subscribers for the latest quarter). The group recorded revenue of $7.86 billion and net income of $1.597 billion |
Fellow shareholders, Our revenue growth has slowed considerably as our results and forecast below show. Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally.."
About Netflix (NFLX)
Netflix is the world's leading internet entertainment service with over 200 million paid memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages. Members can watch as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.
Ten years ago a company like Netflix would have been given a very slim chance of survival. Today its one of the largest companies in the world based on its market capital, and its also part of famed FAANG stocks. FAANG is a acronym for Facebook, Apple, Amazon, Netflix and Google.
Ten years ago a company like Netflix would have been given a very slim chance of survival. Today its one of the largest companies in the world based on its market capital, and its also part of famed FAANG stocks. FAANG is a acronym for Facebook, Apple, Amazon, Netflix and Google.
Overview of Netflix's 1st quarter 2022 earnings report
Our 10% revenue growth in Q1’22 was driven by an 8% year over year increase in average streaming paid memberships and 2% year over year growth in ARM . Excluding a F/X impact of -$280 million, year over 2 year revenue and ARM growth were +14% and +6%, respectively. Operating income of $2.0 billion was above our beginning of quarter forecast of $1.8 billion due to lower than projected content expense. EPS of $3.53 vs. $3.75 a year ago included a $162 million non-cash unrealized gain from F/X remeasurement on our Euro denominated debt.
Paid net additions were -0.2m compared against our guidance forecast of 2.5m and 4.0m in the same quarter a year ago. The suspension of our service in Russia and winding-down of all Russian paid memberships resulted in a -0.7m impact on paid net adds; excluding this impact, paid net additions totaled +0.5m. The main challenge for membership growth is continued soft acquisition across all regions. Retention was also slightly lower relative to our guidance forecast, although it remains at a very healthy level (we believe among the best in the industry). Recent price changes are largely tracking in-line with our expectations and remain significantly revenue positive.
In EMEA (-0.3M paid net adds, or +0.4m excluding the Russia impact), we saw a slowdown in our business in Central and Eastern Europe in March, coinciding with Russia’s invasion of Ukraine. Paid net additions in LATAM totaled -0.4M; similar to recent quarters, we believe a combination of forces including macroeconomic weakness and our price changes (F/X neutral ARM grew 20% year over year) were a drag on our membership growth. UCAN paid net adds of -0.6M was largely the result of our price change which is tracking in-line with our expectations and is significantly revenue positive. We’re making good progress in APAC where we are seeing nice growth in a variety of markets including Japan, India, Philippines, Thailand and Taiwan.
As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report. For Q2’22, we forecast paid net additions of -2.0m vs. +1.5m in the year ago quarter. Our forecast assumes our current trends persist (such as slow acquisition and the near term impact of price changes) plus typical seasonality (Q2 paid net adds are usually less than Q1 paid net adds). We project revenue to grow approximately 10% year over year in Q2, assuming roughly a mid-to-high single digit year over year increase in ARM on a F/X neutral basis. We still target a 19%-20% operating margin for the full year 2022, assuming no material swings in F/X rates from when we set this goal in January of 2022.
Cash Flow and Capital Structure
Net cash generated by operating activities in Q1 was $923 million vs. $777 million in the prior year period. Free cash flow amounted to $802 million vs. $692 million. We continue to expect to be free cash 3 flow positive for the full year 2022 and beyond. During the quarter, we completed two acquisitions (leading visual effects company Scanline and gaming studio Boss Fight Entertainment), which had a -$125 million impact on cash. We also announced our purchase of Helsinki-based gaming company Next Games. We’ve completed the tender offer and expect to complete the transaction in the second half of 2022. We finished Q1 with gross debt of $14.6 billion after repaying $700 million of our senior notes. We’re now within the top end of our gross debt target range of $10-$15 billion. With cash of $6.0 billion, net debt was $8.6 billion at the end of the quarter, equating to a 1.3x LTM leverage ratio . Given those uses 4 of cash and our minimum cash target, we didn’t engage in share repurchase activity during the quarter.
Paid net additions were -0.2m compared against our guidance forecast of 2.5m and 4.0m in the same quarter a year ago. The suspension of our service in Russia and winding-down of all Russian paid memberships resulted in a -0.7m impact on paid net adds; excluding this impact, paid net additions totaled +0.5m. The main challenge for membership growth is continued soft acquisition across all regions. Retention was also slightly lower relative to our guidance forecast, although it remains at a very healthy level (we believe among the best in the industry). Recent price changes are largely tracking in-line with our expectations and remain significantly revenue positive.
In EMEA (-0.3M paid net adds, or +0.4m excluding the Russia impact), we saw a slowdown in our business in Central and Eastern Europe in March, coinciding with Russia’s invasion of Ukraine. Paid net additions in LATAM totaled -0.4M; similar to recent quarters, we believe a combination of forces including macroeconomic weakness and our price changes (F/X neutral ARM grew 20% year over year) were a drag on our membership growth. UCAN paid net adds of -0.6M was largely the result of our price change which is tracking in-line with our expectations and is significantly revenue positive. We’re making good progress in APAC where we are seeing nice growth in a variety of markets including Japan, India, Philippines, Thailand and Taiwan.
As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report. For Q2’22, we forecast paid net additions of -2.0m vs. +1.5m in the year ago quarter. Our forecast assumes our current trends persist (such as slow acquisition and the near term impact of price changes) plus typical seasonality (Q2 paid net adds are usually less than Q1 paid net adds). We project revenue to grow approximately 10% year over year in Q2, assuming roughly a mid-to-high single digit year over year increase in ARM on a F/X neutral basis. We still target a 19%-20% operating margin for the full year 2022, assuming no material swings in F/X rates from when we set this goal in January of 2022.
Cash Flow and Capital Structure
Net cash generated by operating activities in Q1 was $923 million vs. $777 million in the prior year period. Free cash flow amounted to $802 million vs. $692 million. We continue to expect to be free cash 3 flow positive for the full year 2022 and beyond. During the quarter, we completed two acquisitions (leading visual effects company Scanline and gaming studio Boss Fight Entertainment), which had a -$125 million impact on cash. We also announced our purchase of Helsinki-based gaming company Next Games. We’ve completed the tender offer and expect to complete the transaction in the second half of 2022. We finished Q1 with gross debt of $14.6 billion after repaying $700 million of our senior notes. We’re now within the top end of our gross debt target range of $10-$15 billion. With cash of $6.0 billion, net debt was $8.6 billion at the end of the quarter, equating to a 1.3x LTM leverage ratio . Given those uses 4 of cash and our minimum cash target, we didn’t engage in share repurchase activity during the quarter.
Netflix' management commentary on their 3rd quarter 2020 earnings
Fellow shareholders, Our revenue growth has slowed considerably as our results and forecast below show. Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently. While we work to reaccelerate our revenue growth - through improvements to our service and more effective monetization of multi-household sharing - we’ll be holding our operating margin at around 20%. Key to our success has been our ability to create amazing entertainment from all around the world, present it in highly personalized ways, and win more viewing than our competitors. These are Netflix's core strengths and competitive advantages. Together with our strong profitability, we believe we have the foundation from which we can both significantly improve, and better monetize, our service longer term
Related Topics
Growth Outlook
Since launching streaming in 2007, we’ve operated under the firm belief that internet-delivered, on demand entertainment will supplant linear TV, and that this transition represents a once-in-a-generation opportunity to build a highly popular and profitable entertainment company. People love movies, TV shows and games; broadband and smart TV penetration continue to grow globally with more and more connected devices; and while hundreds of millions of homes pay for Netflix, well over half of the world’s broadband homes don’t yet, representing huge future growth potential.
In the near term though, we’re not growing revenue as fast as we’d like. COVID clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the COVID pull forward. Now, we believe there are four main inter-related factors at work. First, it’s increasingly clear that the pace of growth into our underlying addressable market (broadband homes) is partly dependent on factors we don’t directly control, like the uptake of connected TVs (since the majority of our viewing is on TVs), the adoption of on-demand entertainment, and data costs. We believe these factors will keep improving over time, so that all broadband households will be potential Netflix customers. Second, in addition to our 222m paying households, we estimate that Netflix is being shared with over 100m additional households, including over 30m in the UCAN region. Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth.
Third, competition for viewing with linear TV as well as YouTube, Amazon, and Hulu has been robust for the last 15 years. However, over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched. While our US television viewing share, for example, has been steady to up according to Nielsen, we want to grow that share faster. Higher view share is an indicator of higher satisfaction, which supports higher retention and revenue.
Since launching streaming in 2007, we’ve operated under the firm belief that internet-delivered, on demand entertainment will supplant linear TV, and that this transition represents a once-in-a-generation opportunity to build a highly popular and profitable entertainment company. People love movies, TV shows and games; broadband and smart TV penetration continue to grow globally with more and more connected devices; and while hundreds of millions of homes pay for Netflix, well over half of the world’s broadband homes don’t yet, representing huge future growth potential.
In the near term though, we’re not growing revenue as fast as we’d like. COVID clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the COVID pull forward. Now, we believe there are four main inter-related factors at work. First, it’s increasingly clear that the pace of growth into our underlying addressable market (broadband homes) is partly dependent on factors we don’t directly control, like the uptake of connected TVs (since the majority of our viewing is on TVs), the adoption of on-demand entertainment, and data costs. We believe these factors will keep improving over time, so that all broadband households will be potential Netflix customers. Second, in addition to our 222m paying households, we estimate that Netflix is being shared with over 100m additional households, including over 30m in the UCAN region. Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our COVID growth.
Third, competition for viewing with linear TV as well as YouTube, Amazon, and Hulu has been robust for the last 15 years. However, over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched. While our US television viewing share, for example, has been steady to up according to Nielsen, we want to grow that share faster. Higher view share is an indicator of higher satisfaction, which supports higher retention and revenue.
Fourth, macro factors, including sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from COVID are likely having an impact as well.
Netflix (NFLX) stock price chart over the last 5 years
The image below shows the stock price history of Netflix (NFLX) over the last 5 years. And its been a very good time for Netflix (NFLX) stockholders with the stock increasing by an impressive 118% over the last 5 years. Not the type of returns investors would say no to.
The stock of Netflix is trading at closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of Netflix stock is very positive at this point in time.
The stock of Netflix is trading at closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of Netflix stock is very positive at this point in time.
Netflix (NFLX) stock vs Walt Disney (DIS) stock over the last 5 years
The image below shows the stock price performance of Netflix (NFLX) and Walt Disney (DIS) over the last 5 years. While both these firms are active in the consumer entertainment industry and both are active in the video streaming service industry, the stock price performance and trends of these two firms are very different. Over the 5 year period Netflix returned 118% while the stock of Disney returned 20.8% over the same period of time. Netflix being the clear winner when it comes to stock performance of the streaming services groups over the last 5 years.
Netflix (NASDAQ: NFLX) latest stock valuation
So based on the earnings report of Netflix (NASDAQ: NFLX) what do we value Netflix (NFLX) stock at? Based on the earnings report and the increased competition our valuation models sets a target (full value) price on Netflix of $395.70. Based on our target price (full value price) we believe the stock of Netflix is undervalued.
We usually recommend that long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price) which in this case is $395.70. We therefore believe a good entry point into Netflix is $356 or below. Since the stock of Netflix is below our recommended entry point we believe the stock of Netflix offers value at its current price. So to answer our question at the start of the article on whether you should buy Netflix stock right now. The short answer is yes.
We therefore rate the stock of Netflix (NFLX) as a BUY
We usually recommend that long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price) which in this case is $395.70. We therefore believe a good entry point into Netflix is $356 or below. Since the stock of Netflix is below our recommended entry point we believe the stock of Netflix offers value at its current price. So to answer our question at the start of the article on whether you should buy Netflix stock right now. The short answer is yes.
We therefore rate the stock of Netflix (NFLX) as a BUY
Next earnings release for Netflix
It is expected that Netflix will release its 2nd quarter earnings report for their 2022 fiscal year towards the end of July 2022.