For Netflix (NFLX -2.17%), recovering from the post-pandemic slump is proving a complicated plot line. (For those who are unfamiliar, NFLX is the stock symbol for Netflix on Nasdaq, a global electronic marketplace for buying and trading securities.)
Wait, backtrack. Netflix’s valuation dropped after the pandemic era of binge-watching shows? How does that work?
Netflix’s Letter to Investors, April 2021 — the Post-pandemic Slump
According to Netflix, the company did so well last year that it was hard for this quarter to compare. “We believe paid membership growth slowed due to the big COVID-19 pull forward in 2020,” Netflix said in its letter to investors. Netflix gained a stunning 16 million subscribers in the first quarter (January to March) of 2020 as the COVID-19 pandemic forced people to stay home. It’s pretty hard to top a number that large.
In the first quarter of 2021 (January to March), the streaming service added far fewer new customers than Wall Street expected, missing even its own forecast by millions of subscribers. The following quarter (April to June) was expected to be even more challenging. Netflix saw a gain of just one million new customers, a fraction of the 4.44 million projected by their analysts.
This dismal growth resulted in Netflix shares sinking 11% in after-hours trading to $489.28, wiping $25 billion off the company’s market capitalization in New York trading. Overall, its stock has risen a mere 27% over the past year compared to a 63% increase in the tech-heavy Nasdaq Composite Index (.IXIC).
Netflix defended its low performance, stating that it did not believe competition changed materially this year or impacted its new sign-ups “as the over-forecast was across all of our regions.” Netflix was also optimistic that production delays caused by the pandemic in 2020 will “lead to a 2021 slate that is more heavily second half weighted with a large number of returning franchises,” which would increase business.
Netflix’s investors remained hard to impress. Then “Squid Game” came in and turned the tables.
Netflix’s Letter to Investors, October 2021 — the Success of “Squid Game”
On Sept. 17, 2020, Netflix debuted the sleeper hit South Korean survival drama “Squid Game,” which has given Netflix’s stocks (NFLX) a lift. For the few brave enough to not have been peer pressured into watching it, “Squid Game” is a dystopian series in which contestants desperately in need of money play deadly children’s games to win cash prizes. Netflix revealed last Tuesday that 142 million households of subscribers watched the show in its first four weeks, making it Netflix’s most-watched TV show ever. Netflix co-Chief Executive Officer, Ted Sarandos, conceded at a Code Conference last month that “Squid Game”’s success took even the company by surprise. In its third-quarter (July to September) report, Netflix revealed that viewership for the show in the first four weeks blew past the 82 million who watched the company’s previous record holder, “Bridgerton,” in its first four weeks.
After markets closed on Wednesday, Netflix announced that it had added 4.4 million new subscribers in its most recent third quarter (July to September), exceeding expectations. The company also earned $1.4 billion in profit, up from the $790 million earned during the same period in 2020. Furthermore, revenue jumped up 16% to $7.4 billion.
Netflix now has 213.5 million subscribers globally, surpassing the streaming service’s own expectations as well as those of analysts around the world. The company has also forecast that it will gain an additional 222 million subscribers in the fourth quarter (October to December). The increase in subscribers immediately sent the company’s stock up by as much as 2% in after hours trading before going negative by nearly the same percentage as the night went on.
Netflix plans to keep cashing in on the “Squid Game” craze as it launches apparel and toys tied to its content. “Demand for consumer products to celebrate the fandom for ‘Squid Game’ is high and those items are on their way to retail now,” Netflix wrote in the letter to shareholders. But other disclosures in the earnings report are pushing investors to lock in recent profits. Shares, which hit an all-time high earlier this month, are down 1.9% in premarket trading. Netflix has added roughly 70,000 subscribers in the United States and Canada. While an improvement from the second quarter’s loss, it also signals that the market has become increasingly saturated.
Netflix has maintained a wide subscriber edge in a crowded streaming market that includes rivals Walt Disney Co. DIS, -0.37%, Apple Inc. AAPL, +0.34%, AT&T Inc. T, +1.25%, Comcast Corp. CMCSA, +0.87%, Amazon.com Inc. AMZN, -0.84% and ViacomCBS Inc. VIAC, -0.51%. But with a fresh batch of wildly popular content joining “Squid Game” this quarter, including new seasons of previous hits “The Witcher,” “Money Heist,” and “Tiger King,” Netflix is expected to storm back the rest of the year.
Does this mean now a good time to invest in Netflix?
The question of whether to invest in Netflix seems to have divided investors between those expecting a rosier outlook given the popularity of “Squid Game” and those whose companies have opted for a more muted view.
Jim Cramer at CNBC advised investors to buy shares of Netflix, arguing the stock’s post-earnings decline is creating an attractive purchase point. “When you see Netflix pulling back after a very robust set of numbers and lots of price-target boosts, where management laid out a compelling long-term strategy, you need to look at it as a gift … to buy, not sell,” the “Mad Money” host said, after the streaming giant closed Wednesday’s session down 2.17% at $625.14 per share.
Morgan Stanley’s Benjamin Swinburne took a similar view, even though the company’s results and outlook were “as ‘in-line’ as it gets for Netflix,” in his view. “That does not diminish the importance of validating the move in shares and future growth potential,” he wrote, given the heavy enthusiasm heading into the report.
Other analysts seem to have less upbeat views, with Deutsche Bank’s Bryan Kraft stating, “While, on the one hand, we share the market’s enthusiasm toward Netflix’s very strong 4Q content slate and the optionality it brings to 4Q net adds; on the other hand, we think a 4Q subscriber beat is already more than priced into the stock.”
And as always, the only way to tell is with time.