Netflix stock, which went into today’s Nasdaq session already down 16% in 2022 to date, is getting blitzed in mid-day trading.
Midway through the trading day, the stock had managed to crawl back above $400 from a session low of $380 but was still down a remarkable 20%. Trading volume was more than 10 times normal levels.
The rout followed a fourth-quarter earnings report that disappointed many Wall Street analysts and investors and triggered a larger debate about the outlook for streaming. While the company missed its fourth-quarter target for subscribers by just 200,000 (8.3 million additions vs. the expected 8.5 million), its weak guidance for the current quarter set off alarms. During their quarterly earnings interview, top executives could not identify any one cause for the slowdown in subscriber growth, instead reiterating confidence in the company’s overall trajectory. “For now, we are just staying calm,” Co-CEO Reed Hastings said.
Analysts were anything but calm. Downgrades and downbeat reports from them rained down, and many who opted not to lower their ratings on Netflix did trim their price targets, acknowledging the lackluster numbers. The most notorious bear on the stock, Michael Pachter of Wedbush Securities, issued a note to clients alluding to his long-term and frequently misplaced pessimism about Netflix. In the note, titled “Even a Broken Clock is Right Every Ten Years,” he described Thursday’s earnings report and management commentary as a reckoning. “We believe Netflix investors are just beginning to appreciate Netflix’s future status as a low growth, extremely profitable enterprise,” he wrote. “When they fully appreciate this, we expect Netflix’s share price to decline further.”
Michael Nathanson of MoffettNathanson maintained his “neutral” rating on Netflix shares, but dropped his 12-month price target to $375 from $460.
In addition to pointing out the many reasons he believes investors should pump the brakes on Netflix, Nathanson made a broader point for every company racing to pour billions into streaming. “For many years, we have walked alone down an empty
and dark road asking a simple question of whether streaming is a good business. Many of our clients would say: ‘Of course it is! You damn fool, look at the stock valuation and the massive equity returns that Netflix has generated.’ In fact, along the way, we might have even lost a few clients who were tired of us being wrong on the stock or just too dumb or too stubborn.”
Based on recent trends and the latest financials, Nathanson estimated Netflix could potentially add merely 6 million to 11 million net new subscribers in 2022. “This seems shockingly low compared to the average of 26.5 million over the past five years,” he wrote. The analyst did note that he is maintaining a full-year forecast of more than 20 million, pending any more dispiriting disclosures.
Ben Swinburne of Morgan Stanley downgraded Netflix to “equal-weight,” attaching a price target of $450. In a note to clients, he characterized the stock as overextended and valued based on prior perceptions of the company’s growth curve. “Engagement is growing, churn is declining, and Netflix clearly has pricing power as evidenced by its recent 10%+ US price increase. However, bringing that incremental new member to the service is proving more challenging than we anticipated.”