In the past few weeks, the broad market has faced a substantial decline, pushing down massive indexes such as the S&P 500 and the NASDAQ. However, some stocks such as NFLX (NASDAQ: NFLX) experienced a selloff of over 35% year-to-date.
This selloff merged with Netlifx’s latest quarterly results, raising volatility pushing down the share price. Surprisingly, the reason for this massive decline in Netflix’s share price is almost entirely an overreaction. Let’s understand why.
In Netflix’s fourth quarter, they reported revenue of $7.7 billion which represented an increase of 16% year-over-year. Netflix also brought in $607 million in earnings, growing year-over-year by nearly 12%. However, on a quarterly basis, earnings did drop by almost 60% as income was directed towards developing more content for the streaming platform in the quarters to come.
One of the largest worries for investors is slowing growth, although this quarter demonstrated significant strength in the business through net subscriber additions. Netflix added 8.3 million new subscribers in the fourth quarter,just slightly missing the company’s internal estimate of 8.5 million.
Although, some credit should be given to Netflix for sustaining growth on a year-over-year basis as 2020 was a monumental year for total subscriber numbers. In total, Netflix added 18 million subscribers in 2021 compared to 37 million in 2020. Subscriber growth in terms of percent may be slowing, but overall subscribers continue to climb at a steady rate.
Before shares had declined, Netflix shares were trading at all-time high prices, which was $700.99. Now, the stock sits just below $400 and has continued the downward trend with the broad market.
Overall, Netflix’s latest quarter was quite impressive, but most investors didn’t take it that way. This has created an opportunity for long-term investors to acquire shares if they have been sitting on the sidelines waiting for Netflix stock.
Right now, Netflix shares are trading at a price-to-earnings (P/E) ratio of slightly over 35.8 while its price-to-sales (P/S) ratio sits at 6.32. This is quite low for a business that is consistently growing its revenue and earnings.
The fears of rising interest rates from the Federal Reserve and other central banks have essentially been priced into Netflix’s share price. Netflix also holds a sizable amount of cash, over $6 billion, so it’s unlikely that rate hikes fundamentally damage Netflix’s balance sheet.
Additionally, Netflix raised the price of its subscription plans which should expand earnings and revenue growth in the many quarters to come.
Overall, the valuation is very reasonable because the stock price has declined enough to present a fair value to investors.
Because of this broad market decline related to interest rate hikes, Netflix’s latest quarterly results were significantly misunderstood. Revenue has continued to grow and earnings were only affected because of long-term investment into the content on the streaming platform.
This has made an incredible opportunity for investors who were waiting on the sidelines for Netflix stock to come to a more reasonable valuation. As always, the best time to buy shares in a good-quality business is when everyone else is selling.