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Netflix: don’t tune out just yet

Netflix delivered a string of hit films and shows including Don’t Look Up, Red Notice and Emily in Paris during the fourth quarter of 2021. But even blockbusters could not prevent shares in the streaming king from going down like a lead balloon on Friday.

A warning that subscriber growth would slow substantially in early 2022 prompted investors to knock 22 per cent — or $53bn — off Netflix’s market valuation on Friday. Smart exercise bike maker Peloton Interactive is also warning of lower engagement. The boom in stay-at-home stocks may have finally run its course.

Between the two companies, Netflix is likely to be the most resilient. This makes Friday’s sell-off a buying opportunity.

At just under $400 per share, Netflix is now trading at pre-pandemic levels. The pullback puts the stock on a valuation of 38 times forward earnings, compared to 77 times just 18 months ago.

This is despite the fact that it has become a much bigger company over the past two years. The $29.7bn in revenue it pulled in from its 222m subscribers in 2021 is about 50 per cent more than in 2019.

Netflix’s forecast of 2.5m new users in the current quarter is disappointing. Analysts expected a gain of 4m. Competition from rival streaming services is hurting sign ups.

But the focus on subscriber growth ignores the fact that Netflix has become a much more profitable company. It expects to become free cash flow positive this year. Investors should also not underestimate the utility-like nature of Netflix. Customers in the lucrative North America markets are unlikely to drop the service over small price hikes, especially if the hits keep coming. Plans to monetise intellectual property via an ecommerce shop and video games are also worth keeping an eye on.

Stay-at-home stocks appreciated with such rapid speed that a correction was always in the cards when pandemic warnings eased. Netflix has proved that it can keep extracting more value from existing subscribers. That makes the stock worth watching.

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