Category: NFLX

NFLX – Nasdaq Bear Market: Is This Streaming Stock a Surefire Buy in 2023?

Last year was a horrid one for the tech-heavy Nasdaq Composite Index. Its value plunged 33% during the 12-month stretch. But one bad year shouldn’t stop investors from putting money to work in the markets. In fact, there could be some great buying opportunities right now if you’re willing to remain optimistic.

One such business to consider is Netflix (NFLX -1.12%). The top streaming service stock has been up 60% over the past six months. And after posting a strong quarter to end 2022, the narrative might have changed from negative to positive for this innovator.

Here’s why Netflix might be a surefire buy for your portfolio in 2023.

Pressing play on subscriber growth 

In the fourth quarter of 2022, which ended on Dec. 31, Netflix reported revenue of $7.9 billion, up 2% year over year. While this is a slowdown from the fast growth that shareholders have become accustomed to seeing, it’s worth pointing out that the top-line figure was adversely impacted by a stronger dollar. Because the business generates 54% of sales outside the U.S. and Canada (UCAN), as overseas revenue was converted back to the dollar, Netflix took a haircut.

Nonetheless, what investors really cheered for was the company’s 7.7 million net new subscribers during the quarter. This significantly exceeded management’s forecast of 4.5 million additions, and it’s probably why shares have been up 16% since the earnings announcement.

Netflix’s cheaper ad-based tier, launched in November, is off to a strong start in that engagement between these customers is similar to the ones on the ad-free plans. What’s more, there is minimal cannibalization, or existing users trading down to the lower-cost option. The leadership team believes the ad tier could represent 10% of overall revenue over time. 

After the business lost 1.2 million members in the first six months of 2022, many Netflix bears said the streaming service was done growing. Clearly, this isn’t the case. In fact, all four geographies, even the mature UCAN region, posted solid gains. 

Not the Netflix of old 

Long-time Netflix shareholders must get comfortable with the company’s next phase. Co-founder Reed Hastings is stepping down from his title of co-CEO to move to Executive Chairman. Former COO Greg Peters will join co-CEO Ted Sarandos to lead the entertainment juggernaut. It’s hard to understate Hastings’ importance in spearheading Netflix’s rise and the secular shift to internet-enabled television.

Investors can also expect the days of Netflix burning through cash to be a thing of the past. The business generated positive free cash flow (FCF) of $1.6 billion in 2022, at the high end of what management forecasted last quarter. And for the current year, Netflix expects to earn $3 billion of FCF. Because cash content outlays this year are projected to remain in the ballpark of $17 billion, any incremental revenue should boost the FCF number. 

And with this bolstered financial situation, something naysayers never thought would happen, Netflix plans to continue share repurchases this year, last buying back its stock in 2021. It’ll be interesting to see how management balances trying to achieve growth with returning capital to investors.

Moreover, Netflix currently has $14.4 billion of debt on its balance sheet, all of it fixed rate. The business is in much better shape than some of its streaming rivals. For example, Warner Bros Discovery has a whopping $50.4 billion of debt, while Disney has $45.3 billion. 

Looking at the valuation 

Besides returning to membership growth and finally getting to sustainable positive FCF, prospective investors should look at the stock’s valuation to become more bullish about the company. Even with the stock rising considerably over the past six months, as of this writing, shares traded hands at a price-to-earnings ratio of 37, which is substantially below Netflix’s trailing three-, five-, and 10-year averages.  

And according to Wall Street analyst consensus estimates, Netflix’s earnings per share will increase at a compound annual rate of 19.7% between 2022 and 2027. This means that right now, the stock is trading under 15 times its forecasted 2027 EPS of $24.50. If the multiple contracts to 30, this still translates to a return of 15% over the next five years, good for a double.

The pessimism that surrounded Netflix early last year appears to have switched to optimism. Investors might take the latest quarter’s results as a sign to buy the stock.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

NFLX – Did Netflix Investors Overreact to This New Video-Streaming Feature?

Shares of Netflix (NASDAQ:NFLX) closed Thursday’s trading session 4.2% higher, reaching a peak gain of 5.1% earlier in the day. This market reaction added nearly $12 billion to the video-streaming veteran’s market cap. Netflix had exactly one piece of market-moving news on the table that day.

The news involved a new feature for some Netflix subscribers who access the service through certain Apple (NASDAQ:AAPL) devices. Maybe Netflix traders saw the Cupertino logo and connected it to the idea of “big money,” but I’m afraid it was an overreaction. Here’s why.

A smiling person wears white headphones.

Image source: Getty Images.

What’s new?

A group of deeply engaged Netflix users realized that some of its titles now support Apple’s Spatial Audio technology. This feature relies on the motion-sensing accelerometers in the high-end AirPods Pro earbuds and AirPods Max headphones to deliver an ultra-immersive media experience. Working as an extension of the popular Dolby Atmos system from Dolby Labs (NYSE:DLB), the Spatial Audio platform lets the user travel around the sonic space of a supported media experience.

For example, turning your head while wearing headphones usually doesn’t change anything in the viewing or listening experience, even if your gear supports Dolby Atmos. With Spatial Audio, turning your head or walking away from the iPad or iPhone that is playing your media will make it sound like you weren’t wearing headphones at all. The idea is to make the listening experience more akin to having a set of live speakers but with all the audio clarity, privacy, and convenience of using high-end personal audio equipment.

Apple is broadly rolling out this feature to recent-model iPhones and iPads after its introduction in May. The company sees Spatial Audio as a unique selling point for the pricey AirPods Pro and Max hardware. The Pro buds will set you back $249 and the Max headset costs $549 in the Apple store today.

Why this feature shouldn’t lift Netflix’s stock by $12 billion

I would wholeheartedly support Netflix making a move of this caliber if the price boost were based on a new feature for the untold millions of iPhone and iPad users as a whole. But this discovery concerns a much smaller cohort of deep-pocketed fans of Apple’s best audio equipment.

Furthermore, the head-tracking functions of Spatial Audio are kind of cool but not exactly a game-changing experience. True audiophiles who insist on a genuine sonic space could always sit down with their finely tuned home theater systems, where the head-tracking audio idea comes naturally.

So we’re talking about a small improvement to the Netflix viewing experience for a limited subset of Apple users, and it will take time to roll out full Spatial Audio support to the service’s films and shows.

All of this might add up to a significant money-making opportunity for Apple, which now can market its lavish headsets and earbuds with the understanding that they offer Spatial Audio support on the world’s most popular video-streaming service. But for Netflix, it’s just another minor feather in the hat that is unlikely to unlock any additional revenue streams or additional subscriber sign-ups.

All things considered, Apple might have deserved a $12 billion market-value boost from this move. That works out to an increase of approximately 0.5%, which just gets lost in the ordinary noise of daily market moves anyhow. It’s worth a lot less than that for Netflix, so Thursday’s jump was dramatically overdone.

Red Netflix logo on a beige stucco wall.

Image source: Netflix.

Netflix is still a strong buy

Mind you, I generally don’t mind seeing Netflix shares make large moves to the upside. It is one of my favorite stocks, the largest holding in my personal real-world portfolio, and a fantastic buy for the long haul. Unrealistic market reactions to minor news items — like this one — will soon be swept under Wall Street’s proverbial rug.

If you were thinking about buying Netflix someday soon, nothing much has changed. So you can go right ahead and hit that “buy” button. And if you weren’t, well, nothing much has changed and you can continue to weigh your options.

In the words of master investor Warren Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Netflix is a wonderful company. The exact buy-in price won’t make much of a difference in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – Netflix (NFLX) Up 1.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Netflix (NFLX Free Report) . Shares have added about 1.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Netflix due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Netflix Q2 Earnings Miss, User Growth Beats Expectations

Netflix reported second-quarter 2021 earnings of $2.97 per share that missed the Zacks Consensus Estimate by 6.01% and also fell short of the guidance of $3.16. The figure surged 86.8% year over year.

Revenues of $7.34 billion increased 19.4% year over year and beat the consensus mark by 0.4%. Average revenue per membership increased 8% year over year on a reported basis (4% on a foreign-exchange neutral basis).

The streaming giant added 1.54 million paid subscribers globally compared with 10.1 million in the year-ago quarter and beat its guidance of 1 million paid-subscriber addition.

At the end of the second quarter, Netflix had 209.18 million paid subscribers globally, up 8.4% year over year, beating management’s expectation of 208.64 million paid subscribers.

The subscription growth reflects Netflix’s solid content portfolio amid growing competition from services launched by Apple, Disney, ViacomCBS, AT&T, Discovery and Comcast.

Notably, this company now expects paid net additions to be 3.5 million compared with the year-ago quarter’s 2.2 million.

Shares of Netflix slipped 2% in after-hours trading following the results.

Segmental Revenue Details

United States and Canada (UCAN) reported revenues of $3.23 billion, which rose 13.9% year over year and accounted for 44.1% of total revenues. ARPU grew 9% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base increased 1.4% from the year-ago quarter to 73.95 million. The company lost 0.43 million paid subscribers, down 114.6% year over year.

Europe, Middle East & Africa (EMEA) reported revenues of $2.4 billion, which increased 26.8% year over year and accounted for 32.7% of total revenues. ARPU grew 2% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base increased 11.7% from the year-ago quarter to 68.7 million. The company added 0.19 million paid subscribers, down 93.1% year over year.

Latin America’s (LATAM) revenues of $861 million increased 9.7% year over year, contributing 11.7% of total revenues. ARPU grew 2% from the year-ago quarter on a foreign-exchange neutral basis.

Paid-subscriber base rose 7.2% from the year-ago quarter to 38.6 million. The company added 0.76 million paid subscribers, down 56.6% year over year.

Asia Pacific’s (APAC) revenues of $799 million soared 40.4% year over year and accounted for 10.9% of total revenues. ARPU increased 1% year over year on a foreign-exchange neutral basis.

Paid-subscriber base jumped 24% from the year-ago quarter to 27.88 million. The company added 1.02 million paid subscribers, down 61.7% year over year.

Content Details

Netflix’s second-quarter content slate included Shadow and Bone, Sweet Tooth, Too Hot to Handle Season 2, The Circle, Lupin Season 2, Elite Season 4, Who Killed Sara? Season 2 and docu-series The Sons of Sam.

Movies included Army of the Dead, Fatherhood and The Mitchells vs. The Machines among others.

Netflix has a strong content portfolio for the third quarter of 2021 that includes new seasons of La Casa de Papel (aka Money Heist), Sex Education, Virgin River and Never Have I Ever. Movies include Sweet Girl, Kissing Booth 3, Kate and Vivo.

Netflix plans to spend more than $17 billion in cash on content this year. Through the first half of 2021, the company spent $8 billion in cash on content, up 41% year over year. The company also plans to launch more originals compared to 2020.

Last week, Netflix series and specials received 129 Emmy nominations. With 24 nominations, The Crown tied for the most nominated series. Bridgerton with 12 nominations was also nominated for Best Drama series while The Queen’s Gambit received 18 nominations including Best Limited Series. Cobra Kai, Emily In Paris and the finale season of The Kominsky Method were all nominated for Best Comedy series.

Operating Details

Marketing expenses increased 39% year over year to $604 million. As a percentage of revenues, marketing expenses expanded 120 basis points (bps) to 8.2%.

Moreover, consolidated operating income increased 36.1% year over year to $1.84 billion, driven by higher-than-expected revenue and subscriber growth. Consolidated operating margin expanded 310 bps on a year-over-year basis to 25.2%.

Balance Sheet & Free Cash Flow

Netflix had $7.77 billion of cash and cash equivalents as of Jun 30, 2021, compared with $8.4 billion as of Mar 31, 2021.

Long-term debt was $14.9 billion as of Jun 30, 2021, up from $14.86 billion as of Mar 31, 2021. Streaming content obligations were $21.8 billion compared with $20.73 billion as of Mar 31, 2021.

Netflix reported free cash outflow of $175 million against free cash flow of $691.7 million in the previous quarter.

Guidance

For the third quarter of 2021, Netflix forecasts earnings of $2.55 per share. The Zacks Consensus Estimate is pegged at $3.16 per share, higher than the company’s expectation, indicating growth of 98.7% from the figure reported in the year-ago quarter.

Netflix expects to end the third quarter of 2021 with 212.68 million paid subscribers globally, indicating growth of 9% from the year-ago quarter.

Total revenues are anticipated to be $7.47 billion, suggesting growth of 16.2% year over year. The Zacks Consensus Estimate for revenues stands at $7.31 billion, lower than the company’s expectation.

Operating margin is projected to be 20.7% compared with 20.4% in the year-ago quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 19.82% due to these changes.

VGM Scores

At this time, Netflix has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Netflix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

NFLX – SEC charges Netflix engineers with $3 million insider trading ring

The U.S. Securities and Exchange Commission charged three former Netflix Inc. software engineers and two others with participating in an insider trading ring that netted the group more than $3 million in profits, the agency said Wednesday.

The group allegedly relied on nonpublic information about the growth in Netflix’s
NFLX,
+0.57%

subscriber base — a key metric on Wall Street for gauging the company’s prospects — to buy and sell Netflix securities between July 2016 and July 2019, according to a complaint filed in federal court in Seattle.

Sung Mo “Jay” Jun, a former software engineer at the company, allegedly led the insider trading ring, accessing data on subscriber growth and sharing it with his brother Joon Mo Jun and friend Junwoo Chon, so they could trade Netflix securities ahead of earnings announcements. After Jun left the company, he relied on another Netflix insider and friend Ayden Lee to supply him with the information, the complaint alleged.

The ring used encrypted messaging applications to share the inside information and executed insider trades ahead of 13 separate earnings announcements, the complaint said.

The SEC said that it caught the illegal trades using data analysis tools that can detect when traders have improbable levels of success trading the securities of company over a period of time.

“We allege that a Netflix employee and his close associates engaged in a long-running, multimillion dollar scheme to profit from valuable, misappropriated company information,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office in a press release. “The charges announced today hold each of the participants accountable for their roles in the scheme.”

“The defendants allegedly tried to evade detection by using encrypted messaging applications and paying cash kickbacks,” added Joseph Sansone, Chief of the SEC’s Market Abuse Unit. “This case reflects our continued use of sophisticated analytical tools to detect, unravel and halt pernicious insider trading schemes that involve multiple tippers, traders, and market events.”

NFLX – This Streaming Giant's Latest Move Hints at the Future of Gaming

Besides being known as the poster child of the Reddit trading frenzy in 2021, GameStop (NYSE:GME) actually has a viable business primarily dealing with physical game consoles, discs, and accessories. But after sales peaked nearly a decade ago, the company has failed to keep up with the changing landscape. Video games are increasingly purchased directly by consumers on their various devices, a serious blow for GameStop. 

Now Netflix (NASDAQ:NFLX) wants in on the action, with plans to offer mobile games as a complimentary part of its popular subscription. The $230 billion streaming giant is showing us where the future of gaming lies, and it has nothing to do with the traditional brick-and-mortar model. 

Person with headphones on playing a game on mobile phone.

Image source: Getty Images.

Physical to digital 

In its heyday, GameStop was the face of the gaming world. The business generated revenue of $9.6 billion in fiscal 2011, at a time when people still visited stores frequently for their needs. This was almost double what it produced in the most recent fiscal year, and mimics what many other retailers have been experiencing. In addition to having a sales cycle largely dependent on new game console releases, the company’s bread-and-butter of trading in and reselling physical games became less relevant as consumers could simply download them directly online.

Further cementing GameStop’s fall from grace is the extraordinary rise of mobile gaming. Before the release of the first iPhone in 2007, the gaming industry was largely dominated by handheld devices, consoles, and personal computers. Today, things look completely different, as it’s estimated that more than half of gaming revenues are derived via the mobile channel.

And because people spend more time on their smartphones each year, which was accelerated by the pandemic, this trend is only becoming more pronounced. Mobile gaming revenues worldwide are expected to reach $272 billion in 2030, from less than $100 billion today. Supported by the proliferation of 5G networks, cloud and augmented reality gaming will become more important, enhancing the user experience. 

These trends clearly show us where the future of gaming lies, making Netflix’s recent announcement appear like a prudent strategic move. And GameStop, for the record, has not mentioned anything about entering the mobile gaming market, which is not a good sign. The company will focus on building out an e-commerce operation instead.

It’s all about engagement

Netflix has brought on gaming industry veteran Mike Verdu, formerly of Facebook and Electronic Arts, to head its gaming push. While the business has made clear that this is meant to be complementary to its successful streaming operation, it signals how co-founder and co-CEO Reed Hastings plans to drive higher engagement among his company’s 209 million subscribers. 

You guessed it. It’s by launching mobile games, where the most eyeballs are. According to Newzoo, a consulting and research firm, 2.8 billion of the world’s 3 billion gamers will play on a mobile device this year. Netflix knows that its viewers spend most of their time using the service on a TV, so trying to get more of its customers interacting with the brand on their smartphones could end up being a brilliant move by management. And the timing is noteworthy. As the competition in streaming heats up and viewers have a growing number of choices, Netflix will need to do whatever it can to keep the attention on its platform.

And it’s another nail in the coffin for GameStop’s business. It’s best to stay away from the unlikely turnaround for the troubled retailer, and instead focus on the gaming push at Netflix. The former has clearly demonstrated its lack of innovation and strategic direction, while the latter has been a forward-thinking pioneer. 

The future (and present) of gaming is mobile, and Netflix knows this. While challenges will certainly come up, don’t bet against the streamer’s success. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – Should Netflix Investors Be Worried About More Competition?

It was in 2013 that Netflix‘s (NASDAQ:NFLX) first original series, House of Cards, debuted to a global audience. Ever since, the streaming giant has been winning awards and capturing viewers with its edgy-yet-entertaining original series and movies. But recently, it’s not the only streaming service garnering award nominations, and shareholders might be wondering what’s up. On a Fool Live episode recorded on July 14, Fool contributors Toby Bordelon and Brian Withers discuss whether Netflix has lost its creative content mojo.

Brian Withers: I love Netflix, but I can’t help but think the streaming space is getting crowded. I have more boxes on my Roku to pick from nowadays. One more piece of evidence of this streaming market that’s getting crowded is the Emmy’s, most recently Disney, HBO Max, and Apple TV, all of which are less than just recently, a couple of years old now. Disney+ won 71 Emmy nominations, HBO won 36, and Apple TV 34. Netflix accounted for 60% of all streaming nominations last year, but this year it’s down to 40%. You got to wonder, is Netflix losing its mojo?

Toby Bordelon: No, I don’t think so. I think what you’re seeing is that there’s more competition in the streaming space. Some 40% is still a big portion of that, and I think that’s fine. We’ve got to remember, so Disney is new to streaming space, I think in 2019, only The Mandalorian, that was the only original show they had. Everything else has been 2020, 2021. But it’s Disney, they’ve been around forever, and they know how to make movies that attract big audiences, and win awards, and get critical acclaim on, also on regular television.

I think what you’re seeing, HBO is very similar. HBO makes critically acclaimed shows. It’s just recently they have the streaming service, now Disney is the same way. Disney+ is new. You’re seeing competitors who know what they are doing and have a long history of success now in streaming, and so that ratio is going to change. Netflix isn’t the only one playing in that space anymore in terms of awards.

That’s all that’s going on. I don’t think they’re losing their mojo, now they’re competing directly with Disney instead of ancillary.

Withers: Yes. It’s a little bit in the streaming space, but you definitely have some wonderful players that create great content. HBO has been around since, I remember when I was a kid even, and Disney has been around even longer.

Bordelon: With Disney and HBO going full-steam in streaming, now the fact that Netflix still gets about 40% [laughs] of the streaming space is really impressive.

Withers: Yeah. You’re right.

Bordelon: You consider that, I think they’re fine.

Withers: I’m waiting for the next season of Stranger Things. That’s what I’m looking for.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – Netflix Should Just Admit That Growth Is Slowing

Last week, Netflix (NASDAQ:NFLX) confirmed that its subscriber-growth slowdown continued in the second quarter, as expected. The streaming video pioneer cast this slowdown as temporary, driven by the pandemic’s impact on at-home entertainment consumption and original-content production schedules.

However, evidence that Netflix’s growth is slowing continues to mount. Management should acknowledge this reality rather than resorting to increasingly convoluted arguments to “prove” that its underlying pace of growth hasn’t changed.

The slowdown emerges

Three months ago, Netflix reported that it added 4 million paid subscribers in the first quarter (net of cancellations). That fell short of its quarterly forecast of 6 million paid net subscriber additions. Moreover, the company projected that net paid subscriber growth would slow to just 1 million in the second quarter.

Perhaps in an effort to head off a shareholder panic, Netflix executives described the growth slowdown as a timing issue. The COVID-19 pandemic pulled some subscriber gains forward into 2020, when Netflix posted record growth. A light content slate in the first half of 2021 — caused by pandemic-related production delays — also contributed to the slowdown.

Netflix’s management asserted that this blip in growth wouldn’t last long. “We anticipate paid membership growth will reaccelerate in the second half of 2021 as we ramp into a very strong back half [content] slate,” the company wrote in its first-quarter shareholder letter.

A collage of Netflix content screens on a TV, a laptop, a tablet, and a smartphone.

Image source: Netflix.

More signs of longer-term deceleration

In the second quarter, Netflix grew its global paid-subscriber count by 1.54 million. This beat the company’s forecast of 1 million paid net adds but still represented the lowest quarterly increase in subscriber numbers since 2013, when the company was a fraction of its current size. Even more significant, Netflix projected that it will add 3.5 million paid subscribers globally in the third quarter, well short of the analyst consensus of 5.9 million paid net adds.

Once again, Netflix’s management tried to paint the guidance as being consistent with previous trends. CFO Spencer Neumann noted that if Netflix meets its Q3 subscriber guidance, it will have added over 54 million net paid subscribers over the trailing two-year period — roughly in line with its 56.45 million net paid additions in 2018 and 2019 combined.

However, that two-year period includes the big subscriber surge at the beginning of the pandemic. Netflix’s guidance for 3.5 million paid net adds this quarter compares to 6.77 million in Q3 2019 and 6.07 million in Q3 2018. This strongly suggests that Netflix’s underlying growth has moderated compared to 2018 and 2019, particularly because Netflix can no longer blame a lack of new content for its slower growth.

Face the facts: They aren’t that scary

Slowing growth shouldn’t come as a surprise to Netflix shareholders. Thanks to the service’s amazing success over the past decade, Netflix is virtually ubiquitous in the U.S. and Canada — and not far behind in much of Europe. That naturally makes it harder to keep adding 27 million or more subscribers annually.

Shareholders need not fear this slowing growth. Netflix already generates strong earnings, with operating income on track to reach $6 billion this year. It has ample room to grow its revenue and expand its margins in the coming years, with periodic price increases picking up some of the slack from slower subscriber growth.

Management should stop implying to shareholders that growth will snap back to 2018/2019 levels next quarter or next year. While that could happen, it seems fairly unlikely at this point. Instead, management should acknowledge that subscriber growth has peaked and encourage investors to focus more on Netflix’s long-term earnings and free cash flow potential, rather than pure subscriber growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – One Bright Spot From Netflix's Lackluster Q2 Report

Netflix (NASDAQ:NFLX) investors mostly saw the streaming giant’s second-quarter glass as half empty rather than half full, given Wednesday’s post-earnings stock price pullback of a little more than 3%. Share prices were down again (albeit slightly) on Thursday on lingering worries that the company’s high-growth days are now completely in the past. The company only added 1.54 million paying subscribers during the three-month stretch ending in June, and its customer-growth forecast of 3.5 million for the quarter currently underway was equally concerning to the stock sellers.

There is at least one aspect of the company’s second-quarter earnings report, however, worth celebrating. That is, Netflix has been able to impose price increases that outpace its rising costs, leading to widening per-user profitability.

a person sitting at a table holds a coffee cup while viewing a video on a tablet computer resting on the table in what appears to be a coffee house

Image source: Netflix.

The math on Netflix subscription pricing works

It’s the stuff of ongoing debate. Some investors fear higher prices will make Netflix’s service less marketable. Others believe consumers still see plenty of value in Netflix’s offerings even at a higher price. It’s likely there’s at least a little truth to both ideas.

By and large, though, thus far the company has proven it’s got more than enough pricing power to keep raising its monthly rates.

The graphic below puts things in perspective, plotting the average monthly revenue collected from subscribers in each major market sector. The company’s customer head-count growth is assuredly slowing down, but it’s still growing despite ongoing — or even relatively new — rate increases everywhere except for Latin America.

The monthly price of Netflix service has been steadily rising for years.

Data source: Netflix. Chart by author.

But that’s not the whole story. Far more compelling is the fact the company’s weighted-average revenue per user is significantly outpacing the average per-user cost of offering its streaming service.

Take a look. As of the end of the second quarter, Netflix is collecting an average of $35.01 per quarter per customer, led by U.S. consumers in terms of the total number of customers and the amount paid per month. However, the company only spent $26.36 per quarter per user — a figure that’s been falling since 2019. Simply put, scale is starting to make a measurable difference in Netflix’s profit margins.

Netflix's per-user operating costs have been shrinking even as ARPU has been on the rise.

Data source: Netflix. Chart by author.

There are a couple of noteworthy footnotes to add to the discussion. One of them is the fact that Netflix has spent less on marketing since COVID-19 took hold, perhaps believing bored consumers would find them while shut in at home. Second, the relative growth of the company’s cost of revenue has also been slowed, at least partially due to production shutdowns stemming from the pandemic. Only time will tell to what extent this spending is restored to pre-COVID levels.

Take another, closer look at the chart above, though. Operational spending per user was leveling off as far back as 2018, already widening per-user margins before the coronavirus contagion took shape. This was always the bigger plan.

Not all change is bad

Don’t misread the message. Netflix has plenty of questions to answer for investors. Chief among them is whether or not last quarter’s and this quarter’s tepid subscriber growth figures are the new norm or just a blip born from the extraordinary circumstances of the pandemic. Given the advent of rival streaming services like AT&T‘s HBO Max and Disney+ from Walt Disney, it’s a question well worth asking.

Current and prospective Netflix shareholders, however, can at least take some solace in the fact that the math of this particular business model works. The company is generating decent income on the revenue it’s able to drive, turning a top line of a little more than $7.3 billion last quarter into net income of $1.35 million — figures similar to Q1’s. Even if it shifts from being a pure high-growth name to something more along the lines of a recurring revenue/cash cow sort of play, the bullish argument still holds water. It just holds it in a different way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – 1 Number You Missed From Netflix's Earnings

Netflix (NASDAQ:NFLX) recently announced mixed financial results for the second quarter of 2021. Revenue of $7.34 billion and subscriber growth of 1.5 million exceeded Wall Street analyst and internal  estimates, while earnings per share of $2.97 disappointed. 

It’s clear that the coronavirus pandemic has caused lumpiness in Netflix’s membership numbers, especially following a monster year in 2020. People went from being stuck inside their homes to now returning to some level of normalcy, and there is still some near-term uncertainty. 

While it’s best not to focus too much on any one quarter, there was a key statistic that really stood out. Read on to find out what impact, if any, this metric has on Netflix’s stock. 

Startled person watching tv.

Image source: Getty Images.

Trouble stateside 

As the leader in streaming entertainment now with more than 209 million  subscribers worldwide, Netflix is a dominant force in the new media landscape. But the company’s expansion in the U.S and Canada (UCAN), a region that accounts for roughly 35% of customers, turned negative in the most recent quarter. 

Netflix lost 430,000 paying members in this geographic segment in Q2 2021 compared to Q1 2021. Although management blames  an already large subscriber base in the two developed countries, as well as the second quarter usually being the softest period of the year, it’s still noteworthy for shareholders. 

As competition in this space continues heating up with the arrival of newer rivals, investors are wondering just where Netflix’s growth will come from. It’s increasingly looking like international markets will be the answer. In the three-month period ended June 30, the Asia-Pacific region contributed two-thirds  of net subscriber additions. This will probably be the norm going forward. 

But let me calm any investor worries about the declining UCAN number. First of all, management actually expected a decline based on the reasons I mentioned above (an already large customer base and a traditionally weak quarter). Second, this isn’t the first time a drop has occurred. In Q2 2019, Netflix’s U.S. service lost 130,000 subscribers. In the two years since, the UCAN region has added some 7.5 million  members. The slowdown in 2019 was only temporary.

And finally, I think it would be premature to say that the U.S. and Canadian markets have reached their peak. Combined, the two countries had approximately 134 million broadband households in June 2020 (the most recently available data). Not only does this figure continue creeping higher with each passing year, but it also demonstrates the untapped opportunity for Netflix. Obviously, not everyone will be a streaming service user, but with 74 million  customers in the UCAN region today, there is clearly still some room to grow. 

Looking ahead 

I want to reiterate the point that investors should not put too much emphasis on any one particular quarter. The pandemic has impacted consumer behavior in unpredictable ways, leading to wide fluctuations in the near term. 

After a light content slate during the first half of the year due to production disruptions, Netflix expects more releases in the third and fourth quarters as production sets are back to being fully operational. Management is hoping for an uptick in new members, forecasting 3.5 million net adds in Q3. Furthermore, the company is still on track to spend $17 billion on content this year, something its competitors just can’t match. 

If we take a step back, we can easily see that Netflix’s business is humming along. The company’s massive scale and first-mover advantage give it a huge leg up on other streaming services. Instead of fixating on one quarter’s numbers, it’s best to focus on the bigger picture. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

NFLX – Will Netflix Be a Trillion-Dollar Stock by 2030?

Netflix (NASDAQ:NFLX) represents the “N” in the FAANG cohort of top tech companies, which also include Facebook, Amazon, Apple, and Google’s parent company Alphabet.

But with a market cap of $236 billion, Netflix is also much smaller than its four FAANG peers. Apple is worth more than $2 trillion, Amazon and Alphabet are both worth over $1 trillion, and Facebook has a market cap of $955 billion. Could Netflix also join the 12-zero club within the next ten years? 

Netflix's app running across multiple devices.

Image source: Netflix.

The story thus far…

Netflix has reinvented itself several times since it was founded in 1997. It initially offered DVD rentals by mail, then expanded that model into a subscription service, and accumulated five million members by 2006.

Netflix launched its first streaming platform in 2007, which was subsequently offered on gaming consoles, set-top boxes, and Blu-ray players. It also launched its service internationally.

That expansion boosted Netflix’s audience to 25 million members by 2012. A year later it launched its first slate of original shows — including Orange is the New Black, House of Cards, and Hemlock Grove — to lock in its subscribers and reduce its dependence on licensed content.

Netflix hit 50 million members in 2014, 100 million members in 2017, and 209.2 million members in its latest quarter. That massive audience makes it the world’s largest paid video streaming platform.

Between 2010 and 2020, Netflix’s annual revenue rose from $2.16 billion to $25.0 billion. Its net income surged from $161 million to $2.76 billion.

The challenges ahead…

Netflix still enjoys a first-mover’s advantage in premium streaming videos, but it currently faces a growing list of formidable competitors. The biggest threat is Disney (NYSE:DIS), which owns a massive portfolio of first-party content and offers its services at lower prices than Netflix.

Disney+, the company’s flagship platform, has already accumulated nearly 104 million subscribers since its launch in late 2019. By comparison, it took Netflix’s streaming platform ten years to hit 100 million subscribers. Disney expects Disney+ to reach 230 million to 260 million subscribers by the end of fiscal 2024.

A person watches TV in a dim room.

Image source: Getty Images.

Disney also owns Hulu and ESPN+, which served 41.6 million and 13.8 million subscribers, respectively, last quarter. Hulu hosts more mature content than Disney+, while ESPN+ streams live sports — a frequently requested feature that Netflix still doesn’t offer.

Other challengers include Amazon’s Prime Video, AT&T‘s HBO Max, Apple TV+, and stand-alone streaming services from traditional TV networks. This ongoing fragmentation of the streaming market could limit Netflix’s pricing power, make it more difficult to gain new subscribers, and force it to spend even more money on expensive original shows and movies to retain its existing audience.

Netflix has already been exploring new ways to differentiate its platform. It’s licensing more anime content and expanding its children’s programming, and it even launched an online store to sell tie-in merchandise. It’s also planning to expand into video games by offering free mobile games to subscribers.

The road to $1 trillion

Netflix’s stock has rallied about 1,200% over the past decade. But to cross the $1 trillion mark, it needs to more than quadruple in value.

Analysts expect Netflix’s revenue to rise 19% to $29.7 billion this year, then grow 15% to $34.2 billion next year. Netflix’s growth will likely decelerate afterwards, for two simple reasons: It’s saturating its developed markets like the U.S., and it faces too much competition around the world.

But let’s assume Netflix continues to roll out compelling original content, locks in more users with niche content like anime, and expands its digital ecosystem with video games and online merchandise.

If Netflix’s revenue growth meets analysts’ expectations for the next two years and continues growing at an average rate of 10% from 2023 to 2030, it could generate $73.3 billion in annual revenue by the final year. If Netflix is still trading at about eight times sales, it would be worth nearly $600 billion.

If Netflix grows it revenue at an average rate of 15% from 2023 to 2020, it would generate $104.6 billion in annual revenue by the final year. At eight times sales, it would still fall short of the $1 trillion mark.

But Netflix’s price-to-sales ratio will likely decline if investors think its high-growth days are over, which would result in much lower market caps. Investors should take a look at Netflix’s Chinese counterpart iQiyi, which trades at just two times this year’s sales and about 30% below its IPO price, to see what happens when a high-growth streaming video platform loses its momentum.

The key takeaways

Netflix’s growth over the past decade has been stellar, but much of its success can be attributed to its first-mover’s advantage in the streaming market. However, that advantage will likely fade over the next decade as competitors like Disney carve up the market. Netflix should keep growing over the next decade, but its chances of joining its FAANG peers in the trillion-dollar club by 2030 are slim.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.