Don’t Trust the Bears on Netflix Stock
Netflix, Inc. (NASDAQ:NFLX) has lost 1.42% year-to-date, yet in December 2015, Netflix stock surpassed $130.00, reaching an all-time record-high. Amazon.com, Inc. (NASDAQ:AMZN), which has launched its own online streaming video product service, “Prime Video,” which has distracted Netflix investors away from the prize. They fear, perhaps, that Amazon, given its admirable business record, could beat Netflix at its own game.
Yet Netflix stock is under pressure from Wall Street to grow at a breakneck pace. That’s simply not possible; it’s silly to expect it. Netflix’s quarterly results were impressive by any standard, simply because the company chose to be cautious, predicting to add 2.5 million subscribers globally during the second quarter. Investors were selling it on Tuesday. (Source: “Is Netflix’s International Growth Slowing Down?” Forbes, April 19, 2016.)
They should be buying it. At least the smart ones will recognize the good opportunity that Netflix stock has become.
That is not quite the case. Netflix may have experienced a slight blip over the past few days. Yet, Netflix stock is still trading more than 20% higher than a year ago and for all that “Amazon Prime” might become, Netflix already “is.” Yes, Amazon has built its library of films and charges a bit less than Netflix for its service, but that is not the point. Netflix’s main advantage is that it produces its own shows. Netflix’s original series are what drives its subscriber numbers—and big numbers they are.
Netflix stock remains the one to buy in the video streaming sector. One of the key indicators that investors should consider when investing in a company like Netflix is the company’s number of subscribers. Netflix is really competing with more traditional entertainment forms like television, DVDs, and even the cinema. For now, Netflix’s growth, as measured by subscriber numbers, is more important than its earnings per share (EPS). Not by chance, last January, at the Consumer Electronics Show (CES) in Las Vegas, Netflix stressed its expansion, which is now targeting 130 countries. (Source: “At CES, Netflix Adds Over 130 Countries to Streaming Service,” The New York Times, January 6, 2016.)
For argument’s sake, were you to travel to Guinea Bissau, you would be able to catch your favorite show on Netflix. (Source: “Netflix is now available in almost every country in the world,” The Telegraph, January 6, 2016.) Where is Guinea Bissau? It’s near Guinea and Senegal, but that’s not the point. The point is that Netflix is growing in countries most people haven’t even heard of. The big move will come when Netflix can overcome keen censors in the People’s Republic of China. Investors will want to own Netflix stock when that happens, because that could drive exponential growth.
Chinese viewers are already enjoying Netflix in the Republic of Taiwan—the step to the mainland is not far away. Indeed, Netflix co-founder Reed Hastings and chief content officer Ted Sarandos were at the White House for a State Dinner for China’s President Xi Jinping. On that front, Amazon’s people were also on hand. (Source: “Netflix’s Great China Challenge,” The Diplomat, March 25, 2016.) But while Netflix poses a “cultural” threat, which the company is already challenging by adding Chinese (Mandarin) to its languages (source: Ibid), Amazon will have a more difficult time selling its streaming service, because Amazon competes with a major Chinese retailer: Alibaba (NYSE:BABA). This is beside the fact that Netflix’s many original series, including House of Cards, allow it to offer more bang for consumers’ hard-earned dollar than Amazon Prime.
Netflix has cut the number of new subscribers it expects for the second quarter. This is what caused shares to fall by eight percent on Tuesday. Still, Netflix forecasts two million international net additions in Q2, compared to 2.37 million in the same period in 2015. Netflix said the international forecast suffered by comparison to 2Q15 because of the Australia/New Zealand launch, which boosted growth in Q2 last year. (Source: “Netflix cuts Q2 international forecast,” BroadbandTVNews, April 19, 2016.) Nevertheless, in the outcome of Netflix’s growth, the main bullet point is that Netflix is entering more homes, worldwide, every day.
Yes, it is facing competition, which is fierce and coming from mighty sources, but Netflix is the video streaming service of choice. As of March 31, 2016, Netflix had 77.71 million paying subscribers. That is 6.87 million is more than three months earlier. This is the largest increase recorded in the last five quarters for the company. (Source: Ibid.)
Netflix expects to be able to surpass the 80 million paying subscribers mark in the next quarter, which means adding three million more subscribers—a slowdown in recruitment that the company justified by the seasonality of its business.
Aside from the number of subscribers, Netflix’s revenue is also growing. It reported growth of 29.5% year-over-year and 8.4% over three months. For the next quarter, Netflix expects a turnover of 1.964 billion.
Netflix somehow managed to disappoint Wall Street analysts with the announcement, because consensus was around $2.0 billion. Indeed, if Netflix stock, which is trading almost 11% down today, is suffering, it’s because of excessive expectations from rather greedy analysts. Netflix has enough monetary growth to keep developing new content. It is doing what it must in order to challenge competitors around the world. Netflix has some 20 years of experience and is the undisputed leader in original content, which gives Netflix stock more than a leading edge.