Jan 26, 2022
With the market’s rough start to 2022, investors are reminded once again that stocks — even the best ones — don’t always go up.
Case in point: Netflix was one of the top-performing S&P 500 stocks of the past decade, returning more than 5,700% from 2012 to the end of 2021. But it’s a completely different story this year.
Advertisement
The company reported Q4 earnings along with guidance last week, and Wall Street didn’t like it one bit.
Netflix shares plunged nearly 22% Friday on subscriber growth concerns, chopping off $49 billion from its market capitalization.
After a weekend to digest the news, investors have continued to sell heavily. As of this writing, Netflix shares are down almost 30% over the past five days.
A plunge of this magnitude can seem scary. But before giving up on Netflix completely, here are three reasons why investors should consider going against the herd.
1. Still the leader
Netflix’s net paying subscriber additions for Q4 clocked in at 8.28 million, right in line with Wall Street expectations.
But management’s subscriber-count guidance for next quarter — only 2.5 million new accounts — triggered serious concerns over increasingly stiff streaming competition from the likes of Disney+ and HBO Max.
That said, investors shouldn’t overlook the fact that adding over eight million subscribers in Q4 is still very impressive, particularly for a platform that already has a massive audience base.
Advertisement
With Netflix’s global streaming paid memberships standing at 221.8 million, the company is still far and away the dominant digital streamer.
And while the next couple of quarters will certainly be bumpy, long-term tailwinds remain squarely in Netflix’s favor as consumers continue to cut their cable at a breakneck pace.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — are you doing the same?
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Robert Kiyosaki says this 1 asset will surge 400% in a year and begs investors not to miss this ‘explosion’
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
2. Pounce on the plunge
This isn’t exactly the first time Netflix shares have crashed on disappointing subscriber growth.
In 2015, the company’s subscriber guidance for Q4 came in well below expectations, sparking an 8% selloff the following day. And in the following year, its Q2 subscriber numbers triggered a 13% crash in the shares.
For investors who ignored the noise and purchased Netflix on those two down-days, they are currently sitting on returns of 263% and 327%, respectively.
Advertisement
Priced at around $377 per share, the video streaming giant is currently down more than 46% from its 52-week highs.
In fact, the shares have fallen so far that they’re now at pre-pandemic levels.
Giving up nearly two years’ worth of gains is a tough pill to swallow for Netflix investors. But for value-hunters with a long-term time horizon, it might be one of the best buying opportunities to come around in a while.
Consider this: In 2019, Netflix’s price-to-earnings multiple was 104 – quite expensive, even for growth stocks. But thanks to the recent plunge, the stock sports a P/E of just 34, representing a massive discount from Netflix’s typical sky-high earnings multiples.
3. Strong financials
The last reason to consider Netflix is the best and most simple one: fundamentals remain rock-solid.
In Q4, Netflix generated $7.7 billion of revenue, representing a 16% increase year over year. Earnings came in at $1.33 per share, up 12% from the year-ago period.
Advertisement
Despite the weak subscriber guidance, management still sees revenue growth of 10% next quarter to $7.9 billion.
Most importantly, management expects the company to become free cash flow positive for the full year 2022 and beyond.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Bet on a big bounce?
While Netflix has had a painful start in 2022, it still has some bullish supporters on Wall Street.
Cowen analyst John Blackledge is keeping an outperform rating on the stock. While he lowered his price target from $750 to $600, it still suggests potential upside of about 60%.
BMO Capital Markets analyst Daniel Salmon also maintained his outperform rating on Netflix with a price target of $650 — implying upside of more than 70%.
There’s a good chance that Netflix shares will remain under pressure over the short term. But given its still-dominant position in video streaming, Netflix’s ability to provide outsized long-term returns looks stronger than ever.
Trending on MoneyWise
- 4 Ways to Earn Big Returns in 2022 Without the Shaky Stock Market
- Jim Rogers: Next Bear Market Will Be ‘Worst in My Lifetime’ — He'll Rely on 3 Assets
- Robert Kiyosaki Says We're Already in a 'Technical Depression' — He's Using These 3 Assets for Protection
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- Inside a $1B real estate fund offering access to thousands of income-producing rental properties — with flexible minimums starting at $10
- Vanguard’s outlook on U.S. stocks is raising alarm bells for retirees. Here’s why and how to protect yourself
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
