Everyone who pays consideration to monetary information will pay attention to Netflix’s (NASDAQ:NFLX) huge share worth decline following the Q1 earnings report on April nineteenth. The reported Q1 EPS was 22% above the consensus anticipated worth. The prevailing narrative is that the decline within the variety of subscribers and predicted additional shrinkage, an sudden scenario, triggered the sell-off. The shares fell 35% on the buying and selling day following the report, April twentieth, and are down one other 5% on April twenty first.
12-Month worth historical past and primary statistics for NFLX (Source: Seeking Alpha)
The discount in subscriber numbers is a shock as a result of a lot of the inspiration for the valuation is on excessive anticipated development. After the post-earnings collapse, the ahead P/E is 20.6 and the TTM P/E is 21.6, multiples that don’t require a excessive development fee to justify. This is, the truth is, a decrease P/E than many utility shares. By approach of instance, Southern Company (SO) has a ahead P/E of 21.56 and Duke (DUK) has a ahead P/E of 21.13.
The current decline should be thought of in a bigger context. NFLX hit a 12-month excessive shut of $691.69 on November 17, 2021 and had fallen 50.4% to shut at $348.61 simply previous to the Q1 report. The present share worth is 68.6% beneath the 12-month excessive shut. After reporting report Q1 EPS for 2021 on April twentieth, the quarterly earnings have been decrease in Q2 and Q3 after which dramatically decrease nonetheless for This autumn. In different phrases, the outcomes by a lot of 2021 offered ongoing proof of slowing development and the value declined in consequence. The outsized drop on April twentieth could sign extra about investor capitulation at an enormous scale than being a rational response to the current outcomes.
My argument is that Netflix has been struggling over not less than the final 12 months and that there was stable proof of issues with the valuation, however many buyers ignored these information factors. I final wrote about NFLX greater than a yr in the past, on February twenty eighth, once I assigned a promote score.
Performance of NFLX since my final evaluation on February 28, 2021 (Source: Seeking Alpha)
When I wrote this submit, NFLX had missed EPS expectations for the previous 4 quarters and the TTM P/E was 93. The Wall Street consensus score was bullish and the 12-month consensus worth goal was about 15% above the share worth at the moment. A big crimson flag was that there was a excessive stage of dispersion among the many particular person analyst worth targets, decreasing the meaningfulness of the consensus worth. Among 31 analysts that ETrade aggregated in calculating the consensus, the very best 12-month worth goal was $750 and the bottom was $340. As I’ve famous in a lot of my posts, having the very best worth goal at 2X or greater than the bottom is my rule of thumb for discounting the consensus. Research has proven that the consensus worth goal has a unfavorable correlation with subsequent efficiency when dispersion is excessive. In different phrases, the Wall Street consensus evaluation was sending a bearish sign in February of 2021, despite the fact that the consensus score was bullish and the consensus worth goal indicated an anticipated 15% acquire. I didn’t name out this worth goal dispersion difficulty in my February 2021 submit, though I do in lots of different posts.
Another main concern in early 2021, one which carried a number of weight in my evaluation, was that the choices market was sending a strongly bearish sign. In analyzing shares and ETFs, I depend on the market-implied outlook, a statistical forecast of worth returns that’s calculated from choices costs and represents the consensus view amongst patrons and sellers of choices.
I assigned a promote score to NFLX primarily based on the very excessive valuation, the 4-quarter string of earnings misses, and the bearish market-implied outlook to early 2022. I didn’t cite the excessive dispersion among the many analyst worth targets as a priority, however this was additionally a warning signal.
For readers who’re unfamiliar with the market-implied outlook, a short clarification is required. The worth of an possibility on a inventory displays the market’s consensus estimate of the chance that the inventory worth will rise above (name possibility) or fall beneath (put possibility) a selected stage (the choice strike worth) between now and when the choice expires. By analyzing the costs of name and put choices at a variety of strike costs, all with the identical expiration date, it’s doable to calculate the probabilistic worth forecast that reconciles the choices costs. This is the market-implied outlook. For a deeper clarification than is offered right here and within the earlier hyperlink, I like to recommend this glorious monograph printed by the CFA Institute.
With greater than a yr since my final evaluation, and with NFLX buying and selling at a a lot decrease valuation, I’m revisiting my score. I’ve calculated the market-implied outlook by the tip of 2022 and I examine this to the present Wall Street consensus outlook, as in my earlier submit.
Wall Street Consensus Outlook for NFLX
ETrade calculates the Wall Street consensus outlook by aggregating the views of 38 ranked analysts who’ve printed scores and worth targets for NFLX over the previous 3 months. The consensus score is bullish and the consensus 12-month worth goal is 46.3% above the present share worth. As in my evaluation final yr, there’s a massive unfold among the many particular person worth targets. The highest is 2.4X the bottom. The analysis on the predictive worth of the consensus signifies that that is truly a bearish outlook due to the excessive dispersion.
Wall Street consensus score and 12-month worth goal for NFLX (Source: ETrade)
Seeking Alpha calculates the Wall Street consensus outlook utilizing scores and worth targets issued by 44 analysts who’ve printed their views over the previous 90 days. The consensus worth goal is even greater than ETrade’s and the dispersion among the many particular person worth targets can be greater than in ETrade’s analyst group. Seeking Alpha’s model of the consensus score is a maintain / impartial, versus ETrade’s consensus purchase score.
Wall Street consensus score and 12-month worth goal for NFLX (Source: Seeking Alpha)
The Wall Street consensus outlooks calculated by ETrade and Seeking Alpha are constant, with consensus 12-month worth targets which are about 50% greater than the present share worth and a really excessive stage of dispersion among the many particular person analyst worth targets.
Market-Implied Outlook for NFLX
I’ve calculated the market-implied outlook for NFLX for the 9-month interval from now till January 20, 2023, utilizing the costs of name and put choices that expire on this date.
The customary presentation of the market-implied outlook is a chance distribution of worth return, with chance on the vertical axis and return on the horizontal.
Market-implied worth return possibilities for NFLX for the 9-month interval from now till January 20, 2023 (Source: Author’s calculations utilizing choices quotes from ETrade)
The outlook for the following 9 months is considerably tilted to favor unfavorable returns. The most chance corresponds to a worth return of -17% for this era. The anticipated volatility calculated from this outlook is 51% (annualized). For comparability, ETrade calculates 47% implied volatility for the January 20, 2023 choices.
To make it simpler to instantly examine the possibilities of constructive and unfavorable returns, I rotate the unfavorable return aspect of the distribution concerning the vertical axis (see chart beneath).
Market-implied worth return possibilities for NFLX for the 9-month interval from now till January 20, 2023. The unfavorable return aspect of the distribution has been rotated concerning the vertical axis (Source: Author’s calculations utilizing choices quotes from ETrade)
This view actually illustrates that the possibilities of unfavorable returns are persistently and considerably greater than the possibilities of constructive returns of the identical measurement, throughout a variety of probably the most possible outcomes (the dashed crimson line is nicely above the stable blue line over a lot of the left ⅔ of the chart above). This is a bearish outlook.
Theory means that the market-implied outlook will are inclined to have a unfavorable bias as a result of risk-averse buyers are inclined to overpay for draw back safety (put possibility), however there isn’t any option to measure whether or not this bias is current. Considering the potential for a unfavorable bias within the broader context of the vary of market-implied outlooks that I’ve calculated doesn’t change my interpretation of this market-implied outlook as considerably bearish.
NFLX’s enormous drop following earnings represents a broad capitulation, as many buyers seem to have misplaced religion within the firm’s trajectory. A variety of indicators have been sending bearish indicators over the previous yr and the inventory’s excessive valuations amplified the impacts of dangerous information. The very excessive dispersion amongst particular person worth targets remains to be current. The market-implied outlook continues to be bearish as nicely. While the consensus worth goal is round 50% above the present worth, the rolling 90-day window that’s sometimes used signifies that a number of the worth targets have been made previous to the current information which is, clearly, main many to reevaluate the corporate’s prospects. Against all of this unfavorable information, in fact, the decrease valuation makes the shares significantly extra interesting. I’m altering my score on NFLX from bearish/promote to impartial/maintain, despite the fact that there’s an elevated chance of extra declines from right here. NFLX might not be the expansion engine that buyers have come to count on, however the firm has a lot to admire.