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Netflix on Phone Screen With Popcorn - How to Trade Netflix (NFLX) Stock

Apr 14, 2022

Netflix (NFLX) Stock: How to Trade Q1 2022 Results?

By:Ryan Sullivan

Netflix (NFLX) began trading publicly in May of 2002 and is currently the world-leading network in internet television. As of this morning, Netflix is trading at $346.46, down 50.58% from its all-time high price of $700.99. The all-time high price was posted 148 days (about 5 months) ago on November 17th, 2021. This recent 50% price drop coincides with several fundamental factors that are affecting the streaming consumer base, as well as competitive factors that are affecting Netflix itself.

Figure 1: 12-Month Price Change for NFLX and SPY

Netflix Stock Price: What Caused The Recent Halving of Value?

The last twenty-four months have seen consumers change their behaviors associated with entertainment spending. The Covid-19 pandemic caused consumers to spend less money on entertainment outside of their home and increase the amount of money they spend on entertainment while remaining inside their home. Netflix was poised to provide on demand streaming entertainment before the pandemic and as a result benefited from the change in consumer spending behavior.

Now, about twenty-four months later, we are seeing an easing on Covid-19 travel restrictions and an increase in consumer spending on goods and services outside of the home. This does not necessarily mean that the spending on streaming services should decrease and result in a lower valuation for Netflix, but we are seeing that the price action of Netflix reflects that assumption.

The number of services and service providers in the streaming industry is growing. The options streaming service consumers have now is greater than it has ever been. The quality and quantity of competitors that Netflix must compete with is greater than it has ever been. Amazon Prime, Paramount+, Hulu, Peacock, Disney+, HBO Max, Apple TV+, and Roku, among others, are all competing with Netflix to capture a larger share of consumer spending on streaming services. Each service provider continues to develop their own niche and technology to provide an alternative to Netflix and the rest of the market.

Figure 2: 12-Month Price Change for AAPL, AMZN, CMCSA, DIS, NFLX, and ROKU

Key takeaways:

  • Netflix benefited from restrictions on travel due to the Covid-19 pandemic.
  • The current Netflix valuation reflects an easing of travel restrictions.
  • The quality and quantity of Netflix competitors is greater than it has ever been.

What Insights Do The Quarterly Netflix Fundamentals Tell Us?

Netflix’s current five-year revenue growth is up 236.3 percent. Its current return on assets is 12.15 percent. Over the last five years we have seen Netflix expand its spending on Netflix produced content. Which means it has increased spending on production related expenses and hiring filmmaking producers to acquire its own intellectual property. Although the content Netflix produces has been a hit or a miss, it is reassuring to investors that Netflix has maintained profitability.

Over the last ten quarters, Netflix has missed earnings estimates five times and beat earnings estimates five times. The last four quarters of earnings reports have shown a decrease in net income sales and an increase in total sales. On top of that, the last four quarters have shown increases in total assets and total liabilities.

We can interpret this divergence in net income from sales and increasing total assets by understanding that Netflix continues to reach more consumers as it grows its own production operations. Netflix over the last five years has continued to develop its own content and deliver that content on its own platform. We can interpret this as a move by Netflix to expand its overall deliverable content resources. By delivering their own content to subscribers they do not have to pay royalties to third party content distributors.

Key takeaways:

  • Netflix’s five-year growth has increased and continues to grow recently.
  • Netflix is not a consistent earnings beater.
  • Recent Netflix fundamentals show continued reinvestment and asset growth.

How Should I Play The Upcoming Netflix Earnings?

As the largest player in the internet television market, Netflix leverages its revenue to expand its in-house content offerings. In the near-term Netflix will have to continue to prove that it understands its customer base and provide them with content they seek. The internet television and streaming market is currently incredibly competitive and growing with big players who seek to pull Netflix customers over to their platforms.

To trade Netflix Stock, open an account on tastyworks

Technically speaking, the first quarter of 2022 price action for Netflix has produced a steep bear market. It is going to be difficult for Netflix to reverse this trend unless it can report significant sales and net income gains for the first quarter of 2022. If a substantial earnings beat is not reported in April, it is likely that Netflix will maintain its price action downtrend until the market feels comfortable that the value of the company matches the opportunity that exists in the market, with all competitors considered.

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