Netflix (NFLX) reported a decline in subscribers in the second consecutive quarter. And Wall Street is panicking and predicting the end of the company. Everybody – Youtubers, talking heads on CNBC, Facebook, Reddit is now bearish and talking about the gloom of Netflix being dead. Everybody has a solution now and everybody knows what to do now – after the fact.

So, is Netflix dead? I do not think so. It is just resetting to its true fair value. But also remember that Wall Street is a short-sighted beast. They only look to the next quarter and focus on the wrong thing, in this case, subscribers.

During the Covid pandemic, Netflix was one of the many companies that benefitted from the lockdown. People were sitting at home, playing games, watching movies. Many companies saw significant growth in users. Netflix had millions of new subscribers during that time, too.

In 2018 – 2019 we saw a subscribers base stagnation when Netflix added 28 million new subscribers in 2018 and 27 million in 2019 (the entire 2019 was showing a slow down). But then in 2020 Netflix added almost 37 million new subscribers. That’s almost 40% growth YoY! And now, when the pandemic is over, people are returning back to work and they do not have time to sit in front of the TV watching Netflix, many are unsubscribing from the service. I do not know how about you but to me this was a predictable and natural development.

 

 

Comparing subscribers to the unusual year is foolish as well as it was foolish to chase the stock because of the unusual growth and rally its price from $300 a share to $600 a share.

And Wall Street was cheering like a drunkard over Netflix’s growth. I remember myself thinking if this growth was to be sustainable, where else would Netflix chase the new subscribers? On Mars, maybe?

And now, that the obvious started happening the same imbeciles at Wall Street are saying on CNBC that this is the death of Netflix that is suffering from a streaming war.

However, I do not think Netflix is dead. It is just resetting from an incredibly high valuation but it will grow at the same pace as it was growing before the pandemic. Why?

 

Netflix should stop reporting subscribers

 

We can look at a clue with Apple (AAPL). Some time ago, AAPL reported few phone sales in a few consecutive quarters, and obsessed Wall Street was digging a grave for APPL predicting the end of a behemoth. Saturated market, no more new expensive phones, years of declines ahead, they shouted.

And what did Apple do? They simply stopped reporting the phone sales and focused on revenue and earnings only. No end happened. No dead bodies to bury. And Apple prospers reporting earnings and revenue only and the obsessed Wall Street has one more worry to stop freaking about.

Netflix should do the same and stop reporting subscribers. That number is misleading and has very little value in providing the overall picture of the company’s health. Netflix is an industry leader with the largest subscriber base in the world. The sound in line is Amazon Prime and they only have 70% of Netflix’s subscriber base (Netflix is at 209 million, Amazon 150 million, the rest is way below those numbers).

 

Netflix and inflation

 

Tom Rogers, a media expert, provided a good insight into why he thinks Netflix will actually benefit from the current situation in the long run. He says that during the high inflation many people will be looking at cutting expenses and the first thing that will go is cable TV. They will cut the cord and subscribe to Netflix. Why Netflix? One reason is that Netflix has the widest variety of content compared to other providers (so far, it may change, but like it or not, Netflix provides the largest ad-free content out there). We will see some fluctuations when people will be searching for their best streaming provider and you may see them going from one provider to another before they settle. But that is the nature of this industry too.

I admit, this view is totally in line with my bias and I may be wrong along with Tom Rogers.

 

Netflix and cheap ad-supported subscription

 

One reason why I left the cable TV and refuse to watch other providers is advertising. I hate having my movie cut into pieces with 5 to 10-minute long advertisements. It was a premise of people cutting the cord. It was why Netflix was so revolutionary in the beginning. No ads no obstructions. And now, we are supposed to be going back to what we were cutting off? I still hate Amazon providing paid and ad-supported movies on top of my Prime subscription and I do not watch these movies. I always select “free to me” and browse free movies only.

 

Is Netflix overvalued? Yes and No…

 

It depends on how you look at its price after today’s carnage. In my opinion, the stock is now valued at its multiple (or slightly above it). At the current price of $226 a share, the stock is overvalued for this year and next year’s earnings correlated multiples. The calculated fair value for this year is $163 a share, for 2023 it is $211 a share and for 2024 it is $272 a share.

 

 

So if nothing seriously bad happens, buying at this level should be a good long-term opportunity. And as a long-term investor, I think, the company will grow even more over time. of course, if you are looking for a quick buck by the next quarter, you will have to pass this stock. It will not get there any time soon.

 

Should you buy Netflix or wait?

 

I think there is still a lot of blood and weak hands on the street and many sellers will be dumping their shares. So, it is my opinion that Netflix will go lower for some time. It may be going lower just tomorrow, or we may see a bounce as buyers will step in. But, there are too many subscribers-obsessed investors who now think that Netflix will lose even more subscribers until there will be no one left and these people will be selling. Add short sellers to the mix and the stock will be heading lower.

Thus, I think, we should wait until the dust settles.

I added 10 shares of Netflix after the first 25% drop last quarter, so I am now sitting on a loss. But I am buying for the long term. I plan on holding this stock for the next 30 or more years. I refused to buy when Netflix was at $600 as I thought that it was way too overvalued so I avoided the huge loss. If you are the one who bought at those levels and didn’t sell, your only strategy is either take the loss and move on or keep holding and selling covered calls to lower your cost basis. It will be a long process to get out of the hole, but if you have time on your side, you have nothing to lose, unless you believe, that Netflix is finished.

And, I personally, will be adding more shares once the stock shows its bottom. So not yet. Hold!