How Did Netflix End Up Losing 4 Fold Since Its High of 690?

  1. Investing
  2. The Business
  3. The Management
  4. The Finances (2021)
  5. The Value
  6. With some analysis out of the way, then why did Netflix's share price fall?
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Current Market Price of Netflix from Google Finance

Apart from the recent exodus, the Netflix share price has been falling for the last 6 months. You can see from the graph above that Netflix originally had a high of 690, but today it’s all the way down to 166. If you do the maths, that’s roughly 4 fold less in a span of 7 months. You’d basically call it a crash.

So, how good is Netlfix as an investment anyway? Let’s start off by looking at the company’s fundamentals and then analyze why.

The Business

Netflix is a pretty simple business to understand. It’s the worldwide, market leader in video streaming. It develops and distributes its own shows and movies along with licensed shows and movies from other distributors. Besides being known for its high-quality content, Netflix is also known for giving each viewer his customized video library and making further movie recommendations based on machine learning. Furthermore, Netflix maintains its DVD rental mail service in the US.

Aggregated customer reviews don’t show many high ratings from customers. A big complaint is the ever-increasing price point that consumers must pay to continue using the service. International users complain more about the lack of content, whereas US users appear to be happier with the content provided but complain about the rising costs more.

The Management

Netflix offers a work culture with great benefits and pay, but overall, many employees think that management is poor. This isn’t necessarily bad management in terms of innovation. They’re great at that, but it’s the bad people management. There is no work-life balance and a fear of failure that starts from the top. Glassdoor suggests that this is due to the CEO, Reed Hasting, being an engineer himself, so the company functions on a negative feedback loop rather than caring for its employees’ wellbeing. However, overall working at Netflix seems to be improving year on year.

The Finances (2021)

  • Netflix is a fairly high-profit margin business. For every dollar spent, the shareholders get back 20 cents in operating earnings. This equates to about a 20% operating profit margin.
  • Netflix is a highly leveraged business. The business has a debt-to-equity ratio equal to about 1, which is reduced from last year which was roughly 1.5.
  • The company completely retains all of its earnings and does not pay dividends. Given the increasing share price, this shows that the company does well with its retained earnings.
  • Finally, the company’s depreciation and amortization are a lot greater than its property, plant, and equipment purchase. Most of the costs go to land acquisitions and leasehold improvements. This suggests that Netflix isn’t worried about the depreciation and amortization of its PPE.

The Value

Netflix dilutes its shares every year but more recently has been buying back shares, though it would be noted that the shares were bought back when the prices were peaking. Either way, the buying back of shares indicates that management is thinking about increasing shareholder value although the company often raises capital yearly, which is counter-intuitive to increasing shareholder value.

With some analysis out of the way, then why did Netflix's share price fall?

Financially, the company is profitable and with good profit margins. Although the company has large outstanding debt, its cashflows can pay it off, especially considering that dividends aren’t paid out. However, a fall in customer revenue can hamper this, and that could be a potential explanation for the exodus, at least from an institutional investment level.

From a retail investor's point of view, I would dare to say the share price fell because we’re moving out of the pandemic and the perception that Netflix can maintain its high earnings is becoming slim.

Conversely, a look at non-IFRS figures shows us that Netflix has been greatly getting more viewers year on year even before the pandemic. So, sure this quarter didn’t have as many sign-ups as they thought they’d like to have, but that doesn’t mean that sign-ups won’t go back to normal next year. But, the latest customer reviews of Netflix and increased competition, don’t suggest that customers are willing to stick around.

Despite, the negative outlook, does this mean that Netflix is a bad company? Not really. It’s still profitable but perhaps investors are more looking for large profit companies. Netflix will most likely still run at a profit but not as large as people would like it to.