We last owned Netflix (NFLX) in our portfolios back in 2019, but in the last 2-1/2 years, the streaming giant was too volatile and overheated to give us a sensible entry point, notes Todd Shaver, editor of The Bull Market Report.
But we have now added Netflix back. The stock recently dropped for essentially no reason except that investors were selling everything indiscriminately and there were easy headlines here to justify the gloom.
What was so bad? The company posted $7.7 billion in revenue, up 16% YoY, compared to $6.6 billion a year ago, along with profits of $610 million ($1.33 per share) against $540 million ($1.19 per share) last year.
That's healthy 12% earnings growth, a little better than what we expect from the S&P 500 in the coming year. And it was well in line with Wall Street forecasts, with net new subscriber additions coming in at 8.3 million compared to analyst estimates of 8.2 million. Read that again: 100,000 people more than Wall Street was looking for signed up for Netflix last quarter.
However, people chose to obsess over management's weaker-than-expected projection for new subscriber additions of 2.5 million in the current quarter, down sharply from 4.0 million during the first quarter last year. Clearly subscriber growth is slowing. But revenue and profit is still growing. And the key figures to watch in that respect revolve around net subscriber retention. Is Netflix holding more people than it loses? Of course.
While things are far from rosy, what transpired following the earnings report was nothing short of an overreaction. The key factor behind the projected slowdown in new subscriber additions in Q1 is the lack of big releases or new programming during the quarter, with popular titles such as The Adam Project and Bridgerton Season 2 expected to go live by March.
Yes, Netflix faces an increasingly competitive landscape, with Disney (DIS) and Amazon (AMZN) making large strides with massive war chests, but Streaming is far from a zero sum game. This was made evident with the company’s recent price increases in its US and Canadian markets.
The massive scale of its library gives Netflix plenty of pricing power. Competition in the Streaming market is not for share of wallet. It's simply for buzz and eyeballs, and on that level there can be multiple winners.
With its US and Canada markets reaching maturity, Netflix remains focused on Latin America, Japan, and India for its next stage of growth. The company generated 2.6 million paid subscriptions in the Asia-Pacific region and is considering lowering prices in India to further boost subscribers in the region — not out of any competitive urge but simply to accelerate adoption of Streaming entertainment there.
Needless to say, Netflix remains involved in local content development and acquisition in all of these countries, creating opportunities to transition series that break out in one market to others around the world. Korean shows have become extremely popular in North America. That trend is not going away.
And management is looking beyond passive entertainment. Netflix rolled out a gaming service in November to further monetize its massive captive audience and now plans to expand its portfolio with newer titles focused on casual and core gaming. It has also made acquisitions in this segment, starting with Night School Studios, which made the award-winning Oxenfree game.
So on the surface, Netflix is "suffering" its slowest year-over-year subscriber growth since 2015, with the perfect storm of tough post-pandemic comparisons, rising competition and delayed new releases to blame.
But you are looking at an amazing company with $30 billion in revenue, $6.2 billion in profit and 222 million paying customers.
The recent correction is the perfect opportunity to create a position if you don’t have one and to add to your position if you already have one. After all, the stock is where it was almost two years ago at the beginning of the pandemic and look how much bigger the company is now. And look at the content this company creates.
Where do we start? The Crown, Sneaky Blinders, Bridgerton, Squid Game, Ozark, Emily in Paris, Lupin, House of Cards, and every movie you could ever think of!
Who is going to cancel Netflix with that kind of lineup? And they just raised prices by $1.00-$1.50 a month. In round numbers, that’s about $200 million of additional profits per month, starting in February!
We have added Netflix to our Long-Term Growth Portfolio with a target price of $500 and no sell price. We believe that this company will thrive in the current decade and reward its shareholders with strong performance — but be aware that it could move lower, so pick your entry and remain disciplined.
