Is there a way back into the hearts and imaginations of America’s original video-on-demand streaming service, Netflix?
Netflix Inc. (NASDAQ: NFLX) experienced a dismal 2022 financial year, with its share price deteriorating by more than 50% across the twelve months. The onset of the Covid-19 pandemic, associated lockdowns, and restrictions on economic activity resulted in many individuals and families desperately searching for entertainment. With many turning to Netflix as a source of enjoyment and excitement, the company’s share price increased substantially, but the rally did not continue into 2022. Closing at just under $600 per share on the first trading day of 2022, a very different picture is painted for shareholders today, with the share price opening at $297.51 on 3 January 2023.
Technicals
The initial cup and handle technical pattern breakout and target point have been reached on Netflix, which could see the price action consolidate before the next move. The $332.23 resistance and $252.00 support levels could be the consolidation zone, and the price action will be watched closely for a breakout from these levels. Short interest on the streaming giant has increased by 1% over the last year to 2.59%, putting any thoughts of a short squeeze to rest for now.
There is a possibility of a move higher from current levels back to the $332.23 resistance if the price action is supported by the 50-day simple moving average of the price (blue line). If the price moves beyond the resistance level, the next significant resistance might be $396.14. For the bear case, if the broader market continues its downward trajectory, we could see the price move significantly lower.
Fundamentals
The company’s lacklustre performance in 2022 can be partially accredited to losing subscribers, increased competition, password sharing, and the ongoing war between Russia and Ukraine. During the first quarter of 2022, Netflix reported its first decline in paid users in over a decade, losing 200,000 subscribers and a further 970,000 in the second quarter. The suspension of services in Russia and increased competition, specifically with respect to Disney + gaining substantial market share, continued to weigh down on the share price throughout 2022.
With subscription numbers slowing in growth, Netflix was placed in unfamiliar territory. In a major strategic shift for the streaming giant, Netflix released its Basic with Ads subscription plan to consumers towards the end of 2022. The new ad-supported subscription plan was made available on 3 November to boost revenue. Netflix stated, “more choice, especially for price-conscious consumers, will translate into meaningful incremental revenue and operating profit over time.” At $6.99 per month in the US, subscribers can access Netflix content subject to an average of 4 to 5 minutes of ads per hour. Market participants will remain alert about how the new ad-supported subscription plan supports profitability, market sentiment and subscription numbers.
Nevertheless, despite two consecutive quarters of subscription number declines, Netflix recovered strongly to add 2.4 million subscribers in the third quarter of 2022, far exceeding expectations of 1 million subscribers. The robust recovery is most likely due to the release of Stranger Things 4 in July and Monster: The Jeffrey Dahmer Story in September. The streaming service is ending password sharing soon as this is a major headwind eating into subscriptions. For those who share passwords, an additional fee might be heading your way in 2023.
Taking a closer look at the financial metrics of Netflix, including the latest available financial results, year-on-year figures for the nine months ended 30 September are compared. The company’s revenue for the nine months ended 30 September 2021 increased by approximately 20%, year-on-year, from $18.4 billion to $22 billion. Revenue increased by 8% to $23.8 billion for the nine months ended 30 September 2022.
Net income increased by a healthy 103%, year-on-year, from $2.2 billion to $4.5 billion. Over the next twelve-month period, net income decreased by approximately 2% to $4.4 billion for the nine months ended 30 September 2022. Basic earnings per share (EPS) for the nine months ended 30 September 2021, basic earnings per share (EPS) increased by 102%, year-on-year, from $5.03 per share to $10.17 per share. For the nine months ended 30 September 2022, basic EPS decreased by approximately 2% to $9.98 per share for the nine months ended 30 September 2022.
Sources: Netflix Inc, Koyfin, CNBC, SkyNews, Techcrunch, TradingView.
Disclaimer: Trive South Africa (Pty) Ltd, Registration number 2005/011130/07, and an Authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 2002 (FSP No. 27231). Any analysis/data/opinion contained herein are for informational purposes only and should not be considered advice or a recommendation to invest in any security. The content herein was created using proprietary strategies based on parameters that may include price, time, economic events, liquidity, risk, and macro and cyclical analysis. Securities involve a degree of risk and are volatile instruments. Market and economic conditions are subject to sudden change, which may have a material impact on the outcome of financial instruments and may not be suitable for all investors. When trading or investing in securities or alternative products, the value of the product can increase or decrease meaning your investment can increase or decrease in value. Past performance is not an indication of future performance. Trive South Africa (Pty) Ltd, and its employees assume no liability for any loss or damage (direct, indirect, consequential, or inconsequential) that may be suffered from using or relying on the information contained herein. Please consider the risks involved before you trade or invest.
