Should you buy or sell Netflix stock? What to consider now.

Tuesday news – The company lost subscribers in the last quarter and expects to lose more – is Evidence – proof. The stock lost more than a third of its value on Wednesday.

In the opposite of the role, Netflix [ticker: NFLX] Now it finds itself as a live broadcasting company facing an emerging competition.”

Wells Fargo
‘s

Stephen Cahal on Wednesday. It lowered Netflix’s stock rating to neutral, from buy, and halved its price target to $300.

Netflix’s growth story isn’t over, but it’s definitely in a new chapter. The stock may be dead money in the near term, until the company shows it can re-register again — or investors are convinced that revenue growth and free cash flow depend not only on increases in its user base.

This will take at least a year or two. And the latest influx of competitors like

Warner Bros. Discovery

(WBD),

Walt Disney

(DIS) and

Paramount Global

PARA will show much faster growth in the meantime.

Tuesday evening, Netflix reported a decline in the first quarter 200,000 subscribers, while analyst consensus and the company’s own guidance called for growth of about 2.5 million subscribers. Management said it expected to lose 2 million subscribers this quarter, while the median forecast of analysts was for an increase of about 2.4 million.

Netflix didn’t buy back any shares in the first quarter, which is another disappointment for investors.

Revenue was lower than expected, while earnings per share and free cash flow both beat expectations. Netflix announced $802 million in free cash flow in the period, a record for the first quarter and among the best quarters ever by this metric.

Netflix stock fell 37% on Wednesday, hitting its lowest level since early 2018 at around $225, Wall Street analysts said. stacked with lower rating. (The questionable value of downgrading a stock after it fell more than 30% is a topic for another day. Customers would have preferred the warning before Tuesday report).

Now, at a very low valuation, Netflix stock could be at an interesting entry point for long-term investors wanting to get past the transition. After a tumble on Wednesday, the stock rose just over 20 times this year’s expected earnings per share, compared to about 19.5 times this year

Standard & Poor’s 500.

Management will find new ways to grow, and Netflix’s multi-year start to streaming makes it stand out from the crowd. It’s profitable, it can fund its content investment on its own, and it still makes sense for the company to be able to buy back a lot of stock, despite the purchases being delayed.

The real long-term potential is for Netflix’s stock to become detached from the quarterly swings in subscriber counts as the focus shifts to earnings and free cash flow. Subscriber growth is just an initial measure of how close Netflix is ​​to hitting the jackpot to expand its recurring digital subscription business.

In the meantime, there are other factors that Netflix has to pull as it tries to please shareholders. The problem for the stock is that there is no overnight solution.

“While their plans to reaccelerate growth have advantages, they won’t have a noticeable impact until 2024, which is a long time to wait for what is now the ‘Show Me’ story,” wrote Nat Schindler of Bank of America Securities. to the equivalent of selling from buying, and he dropped his price target to $300 from $605.

While Netflix’s crackdown on password sharing may alienate some users, it’s an opportunity to make money from people who are already connected to Netflix, but aren’t paying for it. This is probably easier than convincing a completely new user to sign up for the service.

Netflix estimates that 100 million users use the accounts of the industry leaders’ 222 million subscribers. It is already testing sub-accounts that allow sharing between households in a few markets and expects a wider reach next year. These additional subscriptions will be high-margin incremental revenue for Netflix.

Netflix also said Tuesday that it is planning a lower-priced, ad-supported tier of its service. This will not be launched for at least a year and will be rolled out in phases to different markets over time. It could eventually help reignite subscriber growth, but it won’t be the 2022 story either.

However, there is still room to increase revenue without registering more subscribers, as evidenced by results reported on Tuesday. Excluding headwinds from currency exchange rates, Netflix revenue is up 14% from last year. This came from an 8% increase in subscribers and a 6% increase in average revenue per subscription – a symbol of the price increase. This may shrink your subscription percentage, but it can raise your overall revenue and profits.

Management said on Tuesday that slowing revenue growth of about 10% with flat operating income margins of 19% to 20% — increasing those numbers would need to wait for revenue growth to speed up again — still meant higher profits. Meanwhile, Netflix’s streaming rivals are still facing years of unprofitable growth.

The transition from increasing subscribers at any cost to a real, profitable business was an inevitable pain point for Netflix, but it has to happen. Netflix today is not the bustling, fast-growing company of the past, but life does not end just because one moves from childhood to adulthood.

Write to Nicholas Jasinski at [email protected]