Netflix & Peloton – Pummelled by normality

Netflix & Peloton pay the price for nose-bleed multiples

Netflix Q4 21 – Virtual to reality

• As the world’s virtual reality of being stuck at home begins to end, people are less reliant on Netflix which combined with rampant inflation has made this luxury one that is the first to be cut.
• Netflix reported good Q4 2021 results with revenues / EPS of $7.71bn / $1.33 ahead of consensus of $7.71bn / $0.83 but it was the outlook that crushed sentiment.
• Here, the number of relevance is new subscribers where the company expects to add 2.5m new customers compared to 4.0m in Q1 2021 and forecasts of 6.3m.
• This gigantic miss immediately raises concerns that the growth phase of this company is over which leads one directly to question the shares’ lofty valuation.
• The result was immediate and brutal with the shares falling 20.0% to $406.7 in after-hours trading resulting in $45bn of paper value going up in smoke.
• The company is also struggling with profitability as it was hoped that growth would help margins to increase but instead the margin outlook for 2022 looks like it will remain flat.
• This comes on the back of a price increase in North America to combat inflation and a fairly light release schedule for the coming quarter.
• However, at the same time, the company has been forced to cut prices in India in order to boost subscriber growth which looks like it is going to be much harder than expected to come by.
• This is especially the case as the pandemic is now starting to end with almost everyone except China accepting that they must live with the virus and opening up their economies.
• The result is that people have many more things to do rather than binge watch another series of Squid Game and are less inclined to subscribe especially when the price goes up.
• The real story here is valuation and has very little to do with the quality or the strength of the company.
• Netflix was on 50x 2022 PER and around 10x EV / Sales which is sustainable only if one can continue to produce very rapid growth.
• The pandemic now looks like it pulled forward new subscribers to Netflix rather than accelerated secular growth meaning that slower growth may be what the company experiences from here.
• This should mean a much lower multiple to its earnings meaning that last night’s rout may just be the beginning.
• I have no inclination to get involved as it still looks expensive given how the growth outlook is rapidly evolving.

Peloton – Falling knife

• Peloton was forced to rush out its Q4 2021 results as reports of factory shutdowns due to weak demand hammered the shares which I think still have much further to fall.
• Q4 2021 revenues / EBITDA was $1.14bn / LOSS $265m broadly in line with consensus at $1.17bn / LOSS $329m.
• The release served as a platform for the company to address the reports of shutdowns but it was unable to refute the devastating conclusions drawn by CNBC from internal documents that it has obtained (see here).
• These documents state that demand is continuing to fall as the world emerges from the pandemic meaning that Peloton has more than enough inventory to meet demand.
• This has forced the company to pause production of Bike, Bike+ and its treadmill until such time as inventories have been worked down or demand picks up.
• In addition, 2021 price cuts have not worked as hoped and now inflation is forcing the company to put its prices back up again by around 10% which will exacerbate demand weakness.
• Furthermore, Peloton is looking at downsizing its workforce which is something that the company has previously stated would be a last resort.
• This strongly implies that there will be more bad news to impart when the company reports its full Q4 2021 results on February 8^th.
• Not surprisingly, the shares were hammered again falling by 24% to $24.2 during the session although comments from the CEO managed to induce an after-hours rally of 9% to $26.2.
• The implication here is that Peloton is in severe difficulty as a result of the huge swings in demand that were caused by the pandemic.
• Not least of these problems is the factory it is building to make its products itself, the necessity of which must now be called into question.
• The company is also facing increased competition on all fronts as gyms are re-opening and competitors are coming up with cheaper alternatives.
• Consequently, there is no knowing where the real demand for Peloton products is going to end up and as a result, there is no way to tell where or when the share price will bottom.
• Hence, I would continue to steer clear of this as there is no bargain to be had.