PhillipCapital Group Research analyst Jonathan Woo has kept a “buy” rating on Netflix with a target price of US$427.
Netflix’s 1QFY2022 ended March results were in line with the analyst’s expectations, where revenue was 24% and patmi at 29% of forecasts. Looking forward, Woo has reduced patmi forecast for FY2022 by 2% on the back of a weaker overall growth outlook.
Nonetheless, Woo likes the stock for its earnings per share (EPS) beating company guidance by 23%. EPS for 1QFY2022 came in at US$3.53, beating previous guidance of US$2.86. The main reason for this were the effects of subscription price increases in several parts of the world that boosted net margins to 20.3%, compared to guidance of around 17%.
However, several negative outlook looms for the group.
Netflix recorded revenue of US$7.87 billion in 1QFY2022, slightly below its expectations of US$7.9 billion, representing a 2% y-o-y growth respectively. Additionally, y-o-y growth has been declining steadily each quarter, with Netflix pointing to relatively high household penetration rates; large number of shared accounts amongst multiple households; and increased competition as headwinds for revenue growth.
This is likely due to the negative paid net additions recorded by the company for 1QFY2022, where this is the first time Netflix has lost subscribers for a quarter in almost 10 years. Netflix mentioned macroeconomic factors such as slowing economic growth, increasing inflation, effects of the Russia-Ukraine conflict, and increased competition as reasons for the negative paid net additions.
Netflix lost 700,000 subscribers from Russia as it suspended services due to the ongoing conflict. Meanwhile, Apac was the only region with positive paid net additions of one million.
As a result, Netflix guided to a two million loss in paid net additions for the 2QFY2022, of which Netlifx cited reasons of slowing acquisition, a negative short term impact due to price increases and typical seasonality weakness of the second quarter compared to the first quarter.
“We believe therefore that revenue generated from raising subscription prices, and increasing monetisation on its platform via password sharing add-ons and lower-end ad plans should still be able to drive top and bottom line growth, even as subscriber growth wanes,” says the analyst.
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As such, Netflix continues to expect additional revenue to be generated from the aforementioned plans, and guided to a y-o-y revenue growth rate of around 10% for 2QFY2022.
Moving forward, Netflix is also shifting its focus way from membership growth, and into other metrics like viewing engagements, overall revenue growth, and average revenue per membership (ARM). The way Woo sees it, the group’s ability to deliver quality content, and its scale of global engagement, should continue to be the foundations that support its business model moving forward.
As at 2.30pm, Netflix is trading at $2.70 down or 1.24% lower at US$215.52, giving it a FY2022 price-to-earnings ratio of 18.1x.
Photo: Bloomberg
