I Don't Like Netflix Long-Term, But Here's How to Trade It
Posted On July 20, 2022
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From the stock’s November apex to its lows of this past May, shares of Netflix (NFLX) surrendered 76.8% of their value. One thing is for sure. Can’t call this stock “overvalued.” The firm released its second quarter financial results on Tuesday night. To call these results “good” would be a stretch. To call them a lot better than feared would be accurate.
Traders are loving the name. Let’s dig in.
For the three month period ending June 30th, Netflix posted GAAP EPS of $3.20, handily beating Wall Street’s expectations, on revenue of $7.97B. The sales number was good enough for year over year growth of 8.6% (13% in constant currency), but not good enough to beat consensus view. Operating income of $1.578B was down 14.6% versus the comparable year ago quarter. Operating margin dropped from 25.2% for Q2 2021 to 19.8%.
Global streaming paid memberships contracted by a rough 970K subscribers to 220.67M. The firm had previously provided guidance for a loss of 2M subscribers and Wall Street had clung to that guidance. Hence, the euphoric response to a number that would have been seen as tragic had the firm not provided such a low bar.
UCAN (US/Canada) drove $3.538B in revenue (+9.4%), as paid memberships contracted to 73.28M (-0.1%). Average revenue per membership increased to $15.95.
EMEA (Europe, Middle East & Africa) drove $2.457B in revenue (-2.4%), as paid memberships increased to 72.97M (+6.2%). Average revenue per membership decreased to $11.17.
LATAM (Latin America) drove $1.03B in revenue (+19.6%), as paid memberships increased to 39.62M (+2.5%). Average revenue per membership increased to $8.67.
APAC (Asia Pacific) drove $908M in revenue (+13.6%), as paid memberships increased to 34.8M (+22.2%). Average revenue per membership decreased to $8.83.
For the current quarter, Netflix sees revenue of $7.838B and diluted EPS of $2.14. Wall Street had been up at revenue of $8.1B and EPS of $2.77 on these metrics. Make no mistake. The bulls are reacting to a Q2 subscriber loss that was less than half of what was expected, but no one is speaking to the fact that the firm guided third quarter financial performance significantly below what had been projected by Wall Street.
What folks would rather point to is the fact that Netflix guided global paid memberships toward actual growth (+1M) for Q3. Never mind that operating margin is expected to sink from Q2’s 19.8% to 16.0%.
Q2 net income of $1.440B, dropped from $1.597B for Q1, but up from $1.353B for the year ago comp. Net cash provided by operating activities amounted to $102.7M, down from $922.8M for Q1, but up from $-63.7M for the year ago period. Ultimately, the quarter provided free cash flow of $12.7M, which was down from $801.6M for Q1, but up from $-175M a year ago.
This left the firm with a net cash position of $5.819B, and current assets of $7.840B. Current liabilities of $7.5B, which was down significantly, make for a current ratio of 1.04. This is an acceptable ratio, and is up from 0.95 six months ago. That ratio was not really acceptable. Netflix has been making an effort to clean up the balance sheet. Gone from the current ratio equation are $699M in short-term debt.
Total assets add up to $46.350B. There are no intangibles mentioned on the balance sheet. You know I like that. Certainly, Netflix would not be out of line to claim significant intangible value. Total liabilities less equity totals $27.274B. Of that number, long-term debt accounts for $14.233B. While I do see that as a bit high relative to the cash position, as long as it can be serviced and it can, it does not significantly impact day to day operations. This entry for long-term debt was $14.693B six months ago.
The effort is there. Between the entries for both long and short-term debt, over six months, Netflix reduced the firm’s debt-load by $1.159B. I am impressed.
An absolute plethora of sell-side analysts have opined on Netflix since this release hit the tape last night. For the sake of brevity I have limited this section to analysis rated at either four or five stars by TipRanks. I have found 15 analysts that qualify. After making their changes, there are three “buy” or buy equivalent ratings, there are 10 “hold” or hold equivalent ratings and there are two “sell” or sell equivalent ratings. Two of the “holds” did not bother to set target prices.
The average target price across the other 13 analysts is an even $243 with a high of $365 (Daniel Salmon of BMO Capital) and a low of $175 (Jeffrey Wlodarczak of Pivotal Research). Omitting the high and low, the average target price of the other eleven analysts drops to $238.09.
I have a few. I see a problem that I don’t think is being spoken of. Netflix still lost a lot of paying customers. A lot of these subscriber losses were in North America. A lot of those folks pay their bills in US dollars. Growth elsewhere, among subscribers paying their bills in their home currency is not a one for one exchange with a lost sub who pays in greenbacks. The outlook bothers me too. Who cares if you add a million subs if doing so crushes margin and pressures earnings?
The stock is not expensive at 18 times forward looking earnings. You have that. You also have an improved balance sheet and positive free cash flow (by a smidge). Then there’s the coming ad-supported, lower priced tier of service that Netflix is working with Microsoft (MSFT) on. Does a lower priced service bring in the subs? Those potential customers may have already gone somewhere else, and might not be looking to add a new streaming service at this time as the national and global economies, to varying degrees, slow down.
Shares of NFLX had retaken both their 21 day EMA and 50 day SMA last week. That brought in the swing crowd and some portfolio managers at roughly the same time. Now add to that a little bit of a short covering. You have Wednesday’s rally on top of Tuesday’s rally. Don’t look for the 200 day SMA. The stock would have to more than double.
Probably should not look for the standard Fibonacci retracements of the November through May selloff either. There are massive unfilled gaps between $248 and $333, as well as between $458 and $507. Will they fill someday? Maybe. Too far away to think about now.
Relative strength is good. The Full Stochastics Oscillator thinks that the stock might be short-term overbought. The daily MACD might be in really good shape if NFLX can pull that 26 day EMA over the zero bound.
Perhaps most importantly, the shares are pressing up against the upper trend line of the Pitchfork model that we drew up for you. That orange line might just be the difference between support and resistance for the rest of the week. I am likely to play this name from the short-side. This would be trading, not investing. I don’t think I like Netflix long-term from either side. Now, I just have to wait for this piece to be published, so I can act.
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