Is Netflix Too Cheap After the Earnings Sell-Off?

Netflix (NFLX 2.30%) got shellacked after its fourth-quarter earnings report, as guidance was well below analyst expectations. The questions is whether a slowdown in growth is a red flag or if the sell-off is a buying opportunity.

In this episode of "Beat and Raise" recorded on Jan. 20, Fool contributors Jeremy Bowman and Brian Withers discuss Netflix's recent round of result and what the market may be missing about the long-term picture.

Brian Withers: Jeremy. I see waiting in the wings. Netflix is down. My shares are down [laughs] 19 percent after hours. What's going on?

Jeremy Bowman: Yeah. Netflix's down pretty hard. Their fourth-quarter numbers were decent but I think this is another case of guidance being the culprit. For the first quarter or the current quarter and also the margins are expected to compress a little in 2022. I'll get my slides going here. Fourth-quarter numbers were pretty solid. Revenue is up 16 percent to $7.71 billion, which matched estimates.

Brian Withers: Can you put it in slideshow mode for us?

Jeremy Bowman: Yeah.

Brian Withers: Make the text a little bigger. Those who have small screens appreciate it. [laughs].

Jeremy Bowman: There we go. Earnings per share, which isn't really the best number to gauge Netflix because there's a lot of different factors make it noisy but it was up 12 percent from the year-over-year. That's a GAAP number as well that beat estimates at I believe about $0.83. Subscriber growth for the quarter was down slightly, was 8.5 million in the fourth quarter a year ago, so 8.3 million, that's still pretty good. I think that's not a problem at all.

Brian Withers: For me, that's amazing.

Jeremy Bowman: Yeah. Right.

Brian Withers: That company has hundreds of millions of subscribers and continues to grow bigger than I ever thought it would get.

Jeremy Bowman: Yes, sorry. I didn't update these quarters, so there's Q4 revenue and then we have this Q1 outlook here. Management had called for 8.5 million for the quarter. The first-quarter outlook, the company only sees revenue growing 10 percent to 7.9 billion. That's about the worst revenue growth, I think maybe in a decade since the Qwikster debacle for those of you who remember that. I think you really start to see Netflix losing its status as a growth stock if that's all it can manage and similarly, 2.5 million subscriber growth, especially coming down from 8.3 million is pretty disappointing. This is a company that Q4 and Q1 historically are its strongest quarters, so you'd expect to see a little better numbers for that in Q1.

Highlights in the fourth quarter, it was a strong quarter for new content, Squid Game, the Korean dystopian show that swept the globe, was the top TV show of the year and then Netflix had its own most-watched movies with Red Notice and Don't Look Up. Those are good content wins for the company. It was also the leader in Emmy and Oscar nominations. As far as results by region, I think the Asia-Pacific region is really the area to watch. That has the most growth for the company and it's also its smallest region by subscribers so it only has about 30 million subscribers. Adding 2.6 million new subscribers, there is pretty good for them. They said they were strong in Japan and India, which are very big markets.

It launched mobile games and it's expanding that in 2022. I think that's an interesting area to watch and good that the company is making progress there. It said it was about break-even on a free cash flow basis in 2021 and it will be positive free cash flow in 2022. Concerns, I think the slowing revenue growth is the biggest one. The company didn't give any commentary on 2022 subscriber growth or revenue growth but 10 percent is not great for Netflix. I think that explains why the stock is down close to 20 percent. It also said that operating margin in 2022 would fall slightly after I think it was around 20, 21 point-something for 2021. They expect it to be down just slightly and it blamed that partly on the stronger dollar, which makes its international revenue worth less.

But the company over the long term is targeting three percentage point increases on average every year in operating margin, so it's a little disappointing to see that moving in the wrong direction in 2022. They did announce some price hikes in the US coming soon. I think that that's a reflection of slowing growth and trying to squeeze more profits out of the mature subscriber base in the US but you wonder how much pricing power they have left when it's a little more than a year after the last price hike, and then finally, competition. This company normally, they've dismissed the competitive threat, but now admit it's having perhaps a modest impact on growth. I think that's true. There's been a lot of changes in the streaming market in the last couple of years with a lot of new launches. Netflix, it seems like it has gone from the disruptor to looking like it's standing a little still, and I think especially with those growth numbers, that's what the market's reacting to right now.

Brian Withers: Yeah. That's unfortunate because it's a solid company and they continue to put out great content. That Don't Look Up show was quite fun and star-studded. They had quite a few top talent actors in there. I think they continue to focus on the international segments and getting more local content for those regions. That will continue to be, I think, their success there, and they have a head-start on everybody in that region of being a global streaming provider.

Jeremy Bowman: Yes, it's a great business. No question about that, but I think the growth issue is-

Brian Withers: It'll be interesting, I imagine. Veehan said that for folks who don't own Netflix is a 20 percent dip a good entry point? My guess is, wait for the conference call, listen to the notes, and for anything else, it will take a while for the stock price, I think to settle down and people to get comfortable with where it is. But Netflix is a solid company and I think a market beater over the next five years. Jeremy, do you feel the same?

Jeremy Bowman: I think they would outperform and I don't think the stock deserves a 20 percent haircut after today's report. But I'd be interested to hear management commentary as well as Reed Hastings is of my favorites. I think he can put it into perspective.