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Netflix: Revenue Growth Deceleration Is Here
Stock Analysis & Ideas

Netflix: Revenue Growth Deceleration Is Here

It’s quite safe to say that most people are familiar with Netflix (NFLX).

With over 222 million paid subscribers (and even more viewers, considering the households included in this figure), Netflix has grown to be virtually synonymous with streaming services. Having the first-mover advantage definitely contributed to establishing its predominant position.

That said, competition has been warming up lately. Big players in the space like Disney (DIS), AT&T (T), and Amazon (AMZN), with their individual services of Disney+, HBO Max, and Prime Video, have flooded the industry. The effects of rising competition and of the increasingly saturated market may already be visible, in fact, with growth decelerating as of Netflix’s latest results.

Netflix’s stock plummeted following its Q4-2021 earnings release, with investors possibly reassessing Netflix’s growth prospects and rich valuation multiple. The stock is currently trading 47% lower from its 52-week highs, yet there may be more room to keep falling lower following the current depleted investor confidence.

I remain bullish on the stock. That said, valuation and competition risks remain, while Netflix’s never-ending requirement to produce original content to stay relevant could continue leading to negative free cash flows.

Decelerated Growth Concerns

Netflix’s Q4 results were rather weak, with top-line growth decelerating to 16% year-over-year based on $7.7 billion in total revenues. Revenue growth was largely driven by a 9% increase in average paid streaming memberships and a 7% growth in average revenue per membership (ARM).

Netflix’s net income managed to grow to $607 million versus $542 million in the comparable period last year. However, this increase hardly pleased investors as the company posted another quarter of negative free cash flow due to its continuously higher spending on content. A positive net income for Netflix means little if there is not a clear pathway to positive free cash flow, which ultimately is the catalyst for capital returns from the company to shareholders.

Another underwhelming announcement in Netflix’s results was management’s soft guidance. The company now expects revenues of $7.9 billion in its upcoming earnings, implying year-over-year growth of just 10.3%. Hence, management sees further deceleration ahead.

Is this worrying? Does this suggest bears’ warnings of a potential slowdown are finally starting to materialize? Perhaps. However, we also need to note that Netflix does not exclusively rely on rapidly extending its subscriber base at this point.

As long as the company manages to sustain its expenditures at more reasonable levels, net income could gradually grow amid a margins expansion.

Netflix’s annual operating margin has been expanding every year consecutively for quite some time now. From just 4.3% in 2016, it reached 20.9% at the end of Fiscal 2021. However, as Netflix continues to allocate more cash in new content, other investments, and debt repayments, it remains unclear when positive free cash flow will appear.

Wall Street’s Take

Turning to Wall Street, Netflix has a Moderate Buy consensus rating, based on 16 Buys, 15 Holds, and three Sells assigned in the past three months. At $521.04, Netflix stock projections imply 40.8% upside potential.

Conclusion 

I remain bullish on Netflix due to the company’s dominance in the space, higher-quality productions lately, and overall brand value. However, investors must be wary of the company’s decelerating revenue growth and consistently negative free cash flow generation, which may keep pulling shares lower.

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