Even if profitable, high-growth companies' earnings reports are often a peculiar task. At high valuations, every word is weighted, and it doesn't take a lot to spook the market.
However, earnings reports at the time of the broad market correction are exponentially harder – a situation Netflix, Inc. ( NASDAQ: NFLX ) just witnessed.
Q4 & FY 2021 earnings report
- GAAP EPS: US$1.33 (beat by US$0.50)
- Revenue: US$7.71b (in line)
- Revenue growth: +16.1% Y/Y
- FY revenue: US$29.7b (+19% Y/Y)
- User growth: +8.3m in Q4 (0.2m miss), +18m FY 21'
- Q1 22' net membership growth projection: +2.5m
- 2022 operating margin target: 19-20%
Investors surely won't like that free cash flow was negative for the third straight quarter, dropping to negative US$569m. Naturally, they ask all sorts of questions, mainly regarding future growth.
- How much of it is left untapped in the core markets?
- Will the prices keep going up?
- What about the competition?
Methuselah – An Average Netflix Subscriber
Netflix has 222 million subscribers, and the latest quarter growth showed +8.28m vs. expected 8.5m, and the Street expectation of 8.32m.
Yet, the after-hours carnage shows the extent of the growth projection miss for a high-growth stock.
For NFLX, which had a market cap of US$225b, 20% drop means US$45b. Divide it by the miss of 220,000 new users, and it looks like the market valued each new customer at roughly US$204,500.
At the most expensive plan (US$20 per month), this works out at 10,225 months, or 852 years per customer. While a caricatured example, it shows that the madness of the markets can indeed be staggering.
What does the future of Netflix look like?
Future outlook is an important aspect when you're buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it's the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a low price.Over the next few years, Netflix's earnings are expected to increase by 82%, indicating a highly optimistic future ahead.
What this means for you:
Are you a shareholder?
After an after-hours carnage , shareholders may be asking themselves – should I sell? It is a question that depends on multiple factors: entry price, percentage of NFLX in your portfolio, other opportunities available... "Panic selling" is often an overreaction, but before you make this decision, take a look at whether its fundamentals have changed. On the other hand, some shareholders might see this as a prime opportunity to add to their position.
Are you a potential investor? If you've been keeping tabs on NFLX for some time, now it might be time to seize the moment and jump in. However, before you do so, you need to verify if your investment pitch still holds. Has anything changed since you set your eye on the stock?
If you want to dive deeper into Netflix, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Netflix (of which 2 can't be ignored!) you should know about.
If you are no longer interested in Netflix, you can use our free platform to see our list of over 50 other stocks with high growth potential.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.