shares of Netflix (NASDAQ:NFLX) crashed badly on Friday after a solid earnings report with weak guidance for the next quarter. We’ve seen this movie a few times and it always had a happy ending. The latest remake should look very familiar in hindsight, and Netflix seems like a fantastic buy at these lower prices.
What happened on Thursday?
Netflix stock fell as much as 25.2% on Friday, even as the company beat Wall Street’s earnings estimates for the fourth quarter of 2021. Earnings rose 12% year over year to $1.33 per diluted share, while revenue rose 16% to $7.71 billion. The average analyst would have settled for about $0.82 per share on revenue of about $7.72 billion.
Subscriber growth also ended up almost exactly where management expected. The company added 8.28 million new subscribers, a rounding error that differs from the forecast of 8.5 million.
Netflix investors started hitting their “sell” buttons when they saw management’s subscriber count forecast for the next reporting period. The company expects just 2.5 million new accounts in the first quarter of 2022. That would be the slowest first-quarter subscriber growth since Netflix spun off digital streaming accounts into a separate business. It would also be the slowest quarterly subscriber growth since the second quarter of 2016, excluding the highly erratic results of the coronavirus pandemic.
What happened in 2015 and 2016?
Let’s look back at some of Netflix’s previous crashes based on the subscriber count guide.
The third-quarter 2015 report sparked an 8.3% sell-off in Netflix stock the next day. In that report, every result came in at or above expectations, but the subscriber guidance for the all-important fourth quarter looked weak at just 5.15 million. When the fourth-quarter update rolled out, Netflix had amassed 5.6 million new net users. If you’d bought Netflix stock on the eve of the third-quarter report haircut, you’d now have a 289% return on that investment.
Netflix investors were nervous again next summer. The company added 1.7 million accounts in the second quarter, below its forecast target of 2.5 million. Share prices plummeted 13% the next day. Several analysts said that the domestic streaming services market is almost completely saturated with 46 million domestic subscribers.
In that report, CEO Reed Hastings told investors that the global user base of 79.9 million paying members tends to fluctuate more widely from quarter to quarter compared to the 30 million accounts at the end of 2012.
“With our large subscriber base, small deviations from forecast in subscriber retention can result in significant variability in net adds, particularly during a seasonally weak quarter of net growth such as Q2,” Hastings wrote.
An investment started on that day shows a return of 354% today.
As for that dreaded market saturation, Netflix now has 75 million subscribers in the US and Canada region, including about 19 million Canadians. That’s up 22% from 2016, proving that the streaming market still had plenty of room to grow.
Netflix is now a scream buy
Of course, past results are no guarantee of future returns. History is guaranteed not to repeat itself. However, Netflix bears seem as oblivious to seasonality and the math of big numbers as ever, having overreacted to the soft first-quarter subscriber target.
Netflix stock is now trading at prices not seen since spring 2020, erasing any gains from the COVID-19 lockdown boom. The stock was undervalued prior to this report. Now it’s arguably the best buy on the market. That crash will be remembered as a huge buying opportunity a few years from now, much like the overreactions to customer growth of 2015 and 2016 or the Qwikster debacle of 2011.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investment thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.