Netflix (NFLX, Financial) lost more than a third of its market capitalization in a tumultuous session on Wednesday when it announced that it had lost subscribers in the last quarter for the first time in 10 years. It looks like many leveraged and/or momentum investors have just thrown stocks into a massive panic, as Netflix previously guided subscriber growth to slow, not decline.
Late Wednesday, news also broke that
Bill Acman (Trades, Portfolio), a renowned hedge fund manager, had participated in the sale, dumping its large stake in Netflix at a loss and saying the fund estimated it lost more than $400 million on the deal. This big outcome must have contributed to the sharp decline. Ackman, who bought 3.1 million shares last January, reacted quickly and sold everything, according to his letters to shareholders.
“While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty,” said its director. hedge fund Pershing Square in a statement on the sale of Netflix. .
When he purchased the shares, Ackman had commented in a letter to shareholders:
“The opportunity to acquire Netflix at an attractive valuation emerged as investors reacted negatively to last quarter’s subscriber growth and management’s short-term outlook. Netflix’s substantial share price decline was further exacerbated by recent market volatility,” Ackman wrote in his letter. “We’re thrilled to add Netflix to our portfolio. Many of our best investments have emerged when other investors with short time horizons have dumped big companies at prices that look extraordinarily attractive when you have a time horizon. long-term”.
Is Netflix now a value stock?
The stock has now crossed three-year lows. The GuruFocus value chart classifies it as a possible value trap:
With an indicated price/earnings ratio of 20, the stock is not expensive given its historical growth. While growth may slow from the 30% Ebitda growth it has seen over the past 10 years, I don’t think it will drop to zero overnight. Growth of around 10% in the future would place the stock firmly in value territory today. I think Netflix should easily be able to do that because once food, housing, and clothing needs are met, people want entertainment, and streaming is a very affordable form of entertainment.
Gurufocus’s discounted cash flow calculator shows that even if Netflix halves its historical growth, going forward there is an adequate margin of safety.
My thesis is that streaming is becoming an oligopolistic industry. I think consumers come and go from a handful of big services like Disney (SAY, financial) Disney+, Warner Bros. Discovery’s (WBD, financial) HBO Max and Netflix. The market settles in an oligopolistic structure and Netflix is dominant in this oligopoly.
Most of the future growth will come from international markets and price increases. The company is still led by CEO Reed Hastings, which I think is a big positive; he has already pulled the company out of many crises, and I am convinced that the management team will be able to pull through. I think it’s a wonderful opportunity to get into the stock if you have a long-term perspective, unlike Ackman.