It’s been a wild roller coaster ride for Netflix (NASDAQ:NFLX) in 2022. After spooking investors with concerns around falling subscribers and a lower growth outlook, the stock has been in the doldrums. Yet thanks to better-than-expected Q3 results, Netflix shares shot higher and managed to finish the week strongly. Should I jump on the bandwagon and buy?
Digging into the results
The Q3 results were ahead of expectations across key metrics including revenue, operating income and membership numbers. The main one that impressed me was the 4.5% year-on-year growth in paid subscribers.
Why is this important? Much of the 56% fall in the share price over the last year came from the poor Q3 2021 results where subscriber numbers dropped to 213m from 220m the previous quarter. Concerns around whether people were cutting back on Netflix, or simply switching to competitors, caused the share price to fall sharply.
Therefore, the fact that we’re seeing the numbers increase again is a good sign that the company is back on track.
Another part of the results that I think was a smart move was the announcement regarding a cheaper ad-supported plan. Not only should this attract new users with the lower price point, but it should also increase revenue via the companies that pay to advertise.
A lot of potential upside for Netflix shares
Even with the 21% rally last week, the growth stock is still a long way away from the highs of the past year. It closed Friday at $291, with the year high at $700.
From that angle, it’s clear that there’s plenty of room to run higher in the coming year. I think what will be critical in achieving this is how the next quarter goes. If the business can beat expectations again, it’ll prove that this wasn’t just a flash-in-the-pan period.
There was a lot of concern around the falling membership numbers before the Q3 results and so investors are understandably wary about the future. Another solid quarter of earnings should mean this concern is quashed, with investors then starting to pile in.
One issue I do have relates to the impact of foreign exchange movements. The US dollar has strengthened significantly this year (circa 20%), with the euro and British pound weakening. Netflix has to repatriate earnings from these regions back to dollars. But as the home currency is strong while the others are weak, it has a negative impact. In fact, the results had an entire page detailing this, concluding that it will negatively impact revenue by $1bn!
The business clearly needs to better manage the treasury operations to mitigate or hedge some of this risk.
Although I do like the Netflix business model, I think it’s a little too soon for me to get excited and buy the stock. Rather, I’m going to wait until the next trading update to see if the membership base is still showing signs of growth.