Netflix (NFLX) has been in the news for all the wrong reasons. Its stock sank to its lowest levels in over four years after reporting a loss in subscribers in its first quarter. It's now been two consecutive quarters with results below estimates. NFLX stock continues to be in a downtrend, with the market sentiment at a remarkably low ebb. I am neutral on the stock.
The company's top-level management has blamed the lackluster performance on the suspension of services in Russia. If you take Russia from the equation, it will be looking at just a 500,000 sequential increase in subscribers. Moreover, it predicts another drop in subscribers by two million on a sequential basis in the upcoming quarter.
The somber second-quarter update suggests that Russia might not be the only problem. Additionally, co-CEO Ted Sarandos commented on the "heightened levels of competition" the business faces.
It appears that the cracks are now appearing in Netflix's business model. Strong competition is eroding its market share and crippling its pricing power.
Subscriber Growth Will Continue Slowing DownNetflix lost a healthy 200,000 subscribers during the first quarter, which came in considerably lower than its previous guidance of 2.5 million new additions. Additionally, it put forward another dreary report for the upcoming quarter, forecasting an over 2 million subscriber loss.
The contraction in subscribers will become a common occurrence for Netflix. We see how the competition, including HBO Max, Disney+, and other streaming platforms, is taking a sizeable chunk of the market. These competitors have deep pockets and will continue investing in original content to drive away customers from Netflix.
Back in January, we saw how investing legend Bill Ackman scooped up a $1.1 billion stake in the company after the fourth-quarter earnings plunge. He believed in the company's long-term potential and how the business had plenty of pricing power to boost margins. However, after the first-quarter results, the investing mogul sold his entire stake at a large loss.
He states that his firm had lost its confidence in the company due to the disappointing subscriber growth. Also, he was skeptical of its plans for ad integration and chasing non-paying users.
Multiple Red FlagsDuring the tail-end of 2020, co-CEO Reed Hastings had talked about the company wanting a simpler business model without all the hullabaloo which comes with advertising. Moreover, he also commented that it would be "strategically disadvantaged" if it decided to go all-in on its advertising efforts due to the lack of data.
However, the pressure has got to Netflix, and it's taken a U-turn on its decision. During the first-quarter earnings call, Mr. Hastings said that he was considering the launch of an ad-supported tier. The development suggests that the streaming giant is now in desperation mode and craving new ways to attract customers.
Furthermore, the enterprise also talked about the problem of password sharing and how it was impacting revenues. In the past, it ignored the issue but now aims to address the problem fully. It would be charging its subscribers extra fees for sharing passwords. The sudden change likely alienates a sizeable chunk of subscribers, driving them to other platforms.
Wall Street's TakeTurning to Wall Street, NFLX stock maintains a Hold consensus rating. Out of 39 total analyst ratings, seven Buys, 29 Holds, and three Sell ratings were assigned over three months.
The average Netflix price target is $302, implying 52.4% upside potential. Analyst price targets range from a low of $235 per share to a high of $405 per share.
The Bottom Line on NFLX StockNetflix lost about 40% of its value since posting its first-quarter results. The challenging macroeconomic trends in the market have fostered a risk-off environment for stocks. NFLX stock, which has enjoyed a premium valuation, is one of the stocks suffering the most amid the crisis.
The slightest crack in a bullish thesis will weigh in on investor sentiment for an expensive stock like Netflix. We are seeing a company feeling the heat of its competition, which continues to expand rapidly.
It will take multiple quarters of subscriber growth to restore investor confidence in Netflix and bring it back to its previous levels. However, it is expensive, in my opinion, and likely to lose more value from current levels.
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FAANG stocks have really felt the turbulence of the broader market sell-off so far this year. In fact, two members, Meta Platforms (FB) and Netflix (the "F" and "N" in FAANG), suffered massive falls from glory, shedding well over half of their value following brutal quarterly earnings results.
Indeed, the FAANG cohort seems fractured, with some beginning to question whether or not a new acronym is needed to represent the best that big tech has to offer. With volatility spreading to the highest-quality members of FAANG like Apple, questions linger as to whether the group will save this market or weigh it down further in what could be another leg lower.
Despite recent swings, FAANG stocks are still best-in-breed. They've become a lot cheaper in recent months, and in this piece, we'll use Tipranks' Comparison Tool to determine which member offers the most value.
Apple (AAPL)Apple is the largest company on the planet, and it needs no introduction. The iPhone maker has held its ground best amid the recent volatility storm facing the FAANG group. Though AAPL stock has held relatively steady, thanks to its exceptional results and enviable balance sheet, shares are still down in line with the S&P 500.
Today, Apple stock is down around 14% from its high, and with earnings on tap today after market close, it's time for the market's moment of truth.
While chatter points to share-taking in smartphones, with Morgan Stanley analyst Katy Huberty pointing to blockbuster earnings for the quarter, all eyes will be on guidance moving forward. Lockdowns in China aren't great news, but if there's a company that can navigate supply chain problems, it's Apple. Its CEO Tim Cook has done a magnificent job of steering Apple through the past two years of supply woes.
If investors don't like Apple's second quarter (and there's a risk that they won't), Apple stock may very well become the best value that FAANG has to offer. At writing, Apple stock trades at a modest 26 times trailing earnings multiple. That's too low, in my opinion, given the firm's booming services business and new innovations that could delight within five years.
Wall Street analysts remain bullish on AAPL, with the average Apple price target of $195.55 suggesting 24.9% upside potential from current levels.
Amazon (AMZN)Amazon stock may very well be the priciest FAANG member, with its elevated 42.6 times trailing earnings multiple. However, Amazon could prove more than worthy of the premium to the peer group, given its disruptive growth prospects.
The company has been doing a stellar job on all fronts. With the "Buy with Prime" button that could prove a game-changer in payments and logistics, Amazon could be in the early innings of its next big growth segment.
It's not just "Buy with Prime" that could unlock next-level revenue growth. The company's video gaming and video-streaming services could act as a one-two punch that makes Prime one of the stickiest services on the planet. Further, continued innovations in robotics could pave the way for a wave of disruption in the physical realm. Indeed, the long-term growth profile couldn't look better.
For now, the stock will wane over broader market woes. The high multiple does the stock no favors.
With earnings scheduled for today after market close, the stock could go either way. Though there were notable headwinds for the quarter, it will be interesting to see how investors react. It has been a very long time since earnings powered the stock higher.
Wall Street analysts are bullish on AMZN, with the average Amazon price target of $4,160.66 implying 50.6% upside potential from today's levels.
Netflix (NFLX)Finally, we have fallen streaming star Netflix, which clocked in two straight quarters of abysmal results. Shares of Netflix are now down over 72%, with a mere 16.8 times trailing earnings multiple.
Undoubtedly, such a low multiple on a FAANG mainstay like Netflix would have been unheard of last year. Yet, here we are. Netflix is now the second-cheapest stock behind Meta based on trailing earnings.
While legendary investor Bill Ackman has jumped ship following the latest brutal results that unveiled a loss of 200,000 subscribers, I do think the stock represents compelling value. The real question is if the subscriber losses are a bump in the road amid a content drought and a rise in competition or if it's curtains for video-streaming as we know it.
Indeed, competitive pressures and tighter consumer budgets are likely factors behind Netflix's brutal quarter. Still, investors would rather jump ship than wait around for any sort of relief.
Currently, Netflix has near-term solutions for alleviating its recent weakness. From getting freeloaders to pay modest price increases, it's clear that the company is pursuing any effort it can to reverse the pain. Such efforts could hurt Netflix more than do it any good, in my opinion.
Netflix has real issues. It needs to create more, better content to justify its price hikes. Otherwise, consumers will jump ship, given switching costs are negligible. Show cancellations and other questionable efforts to beef up margins will do no good, in my opinion.
For now, the company's push into mobile video gaming is a wildcard. What the company really needs is a second season of Squid Game to save it. For investors, that second season can't come soon enough.
Wall Street analysts remain modestly bullish on NFLX in terms of price targets, with the average Netflix price target at $304.29, implying upside potential of 61.4% from current levels. Nonetheless, the stock has a Hold consensus rating.
ConclusionApple and Amazon are the highest-quality FAANG stocks. Both stocks have Strong Buy recommendations, with AMZN stock having the higher upside potential. While Amazon stock may be the most expensive of the group, it does seem like one of the most undervalued.
Netflix has a Hold rating but the highest upside potential, according to Wall Street analysts. Netflix seems like the cheapest FAANG company of the batch, but there are problems at the firm that will not be easy to solve.
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