Is misfiring Netflix now a value stock?
19 MAY, 2022
By Schroders
Netflix excelled during Covid-19, but now its subscriber numbers and share price have tumbled. We find out what this means for the streaming giant and its investors. When streaming service Netflix reported that it had lost 200,000 subscribers during the first quarter of 2022, its share price plunged by almost 40%. What could this be due to?
The US company was one of the main beneficiaries of the Covid-19 pandemic, as lockdowns forced people to stay at home. However, as pandemic restrictions lift and people return to more normal patterns of behaviour, many consumers may question their need to pay for such services.
Another factor could be the cost-of-living crisis, which has been exacerbated by Russia’s invasion of Ukraine. This may be prompting consumers to cut back on non-essential spending.
And some recent media reports have suggested that Netflix subscribers are unhappy at the cancellation of some of the company’s shows, and recent price rises.
Can Netflix’s subscriber numbers recover?
So, is the fall in subscriber numbers a natural part of the business cycle, particularly during a period of rising inflation and higher living costs, or is this something more structural? We asked some of our investment experts.
Is Netflix now a value stock?
Netflix is part of a cohort of fast-growing stocks whose strong share price performance in recent years has helped power equity returns, particularly in the US.
Until recently, investors have been willing to pay ever-higher prices for companies who appear to be growing quickly. However, the downturn in Netflix’s fortunes has seen its valuation decline, as the chart below shows.
Its price-to-earnings (P/E) ratio (current share price divided by expectations for earnings in the next 12 months) has declined rapidly since the start of this year. It now isn’t all that far above the P/E for the MSCI USA Value index.
So could Netflix, or other growth stocks, eventually pique the interest of value investors? Value investors look for companies on cheap valuation metrics, typically low multiples of their profits or assets, for reasons which are not justified over the longer term.
Demand for high quality TV will persist
Beyond debates over growth and value, or the fortunes of individual companies, what does look certain is that TV-watching habits are unlikely to change.
