Weekly Valuation: Netflix Inc – Valutico | 20 April 2022
Netflix shares fell sharply after the latest forecasts. We at Valutico have looked at the figures and analysed whether the share is now undervalued.
- Netflix share has fallen by 25%
- Instead of the 2.5 million user increase, Netflix has lost 200,000 customers
- Netflix “light” subscription with advertisement under consideration
Is Netflix undervalued after the share price fall?
For the first time in more than ten years, the streaming market leader Netflix has had to cope with a quarter with a loss of customers. In the three months to the end of March, around 200,000 paid subscriptions were lost, as Netflix announced on Tuesday (local time) after the US stock exchange closed. Overall, the number of users worldwide fell to 221.6 million at the end of the quarter. Netflix had actually expected 2.5 million new customers. One of the reasons for the decline is the Ukraine war.
Investors reacted massively disappointed – the share came under heavy pressure after trading hours and was at times down by more than 25 per cent. At the beginning of the Corona pandemic, Netflix was still considered one of the big winners of the crisis, but has since had a hard time on Wall Street. Since the beginning of the year, the share price has already fallen by over 40 per cent. The quarterly report also hit the shares of other streaming providers such as Walt Disney, Roku and FuboTV hard in after-hours trading.
Among other things, Netflix blamed the weak figures on its withdrawal from Russia, where all customer accounts were deactivated due to the war of aggression against Ukraine. According to the company, around 700,000 subscriptions were lost over the quarter as a result of the measure. Without this effect, there would have been an increase of half a million users. Netflix also explained that the statistics suffered from the multiple use of customer accounts, as many subscribers shared their passwords. The company estimates that around 100 million households worldwide use the streaming service without paying.
Business outlook the biggest shock
However, the biggest shock to the financial market was the business outlook. It was particularly badly received that Netflix expects to lose subscribers again in the current quarter in the face of increasing streaming competition. And this time the loss is likely to be much greater, with around two million customer accounts. At the same time, Netflix has strong productions in the pipeline with new seasons of hit series like «Stranger Things» and top-class films like «The Gray Man» with Hollywood star Ryan Gosling.
To get growth going again, Netflix could even shake one of its biggest taboos in the future and introduce a cheaper streaming subscription with advertising clips in between. There has never been anything like this at Netflix – CEO Reed Hastings has had little use for it so far. Without presenting concrete plans, he now suddenly showed himself open and explained that an offer supported by advertising could make «a lot of sense». Netflix wants to work on such a solution in the next one to two years.
The last time Netflix posted a quarter with declining user numbers was in October 2011. Despite the recent decline, Netflix remains well ahead of the competition. By comparison, its big rival Disney+ had just under 130 million customers at the end of 2021. But Netflix also had to cut back on profits in the past quarter. Compared to the previous year, the surplus fell by about six percent to 1.6 billion dollars (1.48 billion euros). Turnover increased by around ten percent to 7.9 billion dollars, but still just missed the average expectations of analysts.
In our Valutico analysis we came up with a value range of USD 95 – 110 billion, using DCF with a WACC of 9.7%. As you can see below in the valuation overview and WACC calculation, we calculated the discount rate using a levered beta of 1.08 and a risk-free rate of 3%. Before the price fall, the market cap was around USD 165 billion.