Time to Bail on NFLX Stock? Hardly.
Netflix, Inc. (NASDAQ:NFLX) lost some 20% before its first-quarter earnings announcement exactly a month ago. The sell-off that followed sent Netflix stock down nine percent, crossing a mental barrier for most investors who lost confidence in the company as a result. But these investors were acting rashly; the results did not warrant any sell-off at all.
Wall Street wants Netflix to grow faster than anyone can realistically expect. Indeed, the main factor driving the bearish sentiment that sent Netflix shares below the psychological $100.00 threshold was the company’s cautious guidance.
Netflix said it would add 2.5 million customers worldwide in the current quarter. One can only surmise that some analysts convinced investors that Netflix’s growth rate should have been higher. (Source: “Is Netflix’s International Growth Slowing Down?,” Forbes, April 19, 2016.) Expectations on Wall Street are of the gargantuan variety these days.
Ultimately, investors should understand that Netflix is already a giant, yet it’s also still in its infancy as a producer of original content. Producers know that they can’t have a hit every time, but there is no questioning Netflix’s potential to grow. Netflix is adding subscribers at huge rates and has invaded 200 countries, offering hundreds of hours in original programming and eight feature films alone. That’s just for starters.
As for Netflix stock, most analysts recognize it as a “Buy” or a “Strong Buy.” The mean target price is $118.41 and the highest target price is $150.00. (Source: “NFLX Analyst Opinion,” Yahoo! Finance, last accessed May 19, 2016.)
At its current share price, whether you are bearish tending toward the mean price or bullish, you can get into Netflix stock at a far-below-potential price of $89.00 and have plenty of upside—either way.
In fact, analysts would have done better service to investors by focusing on Netflix’s ability to keep attracting viewers. Netflix is not a mere alternative to cable and DVD rentals; its purpose is more to annihilate and replace them globally. In order to do so, Netflix is expanding its offerings from original series to more foreign language cinema. (Source: “Netflix and Amazon face EU quota threat,” CNBC, May 18, 2016.)
Netflix may complain about the regulatory stress this adds to the company, but the move will ultimately compel it to produce more original and better quality content to compete with European television networks. For example, Netflix has recently enjoyed a major hit in North America and elsewhere with its original blockbuster series Marseille featuring Gérard Depardieu. (Source: Ibid.)
Original series are one of the major drivers of new subscribers to Netflix. With every new series, Netflix can win more subscribers away from cable. Perhaps that is the most important aspect of Netflix stock—the current number of users worldwide. Consider that even as NFLX stock posted poor guidance and revenue that disappointed Wall Street, it finished the first quarter of 2016 with well over 77 million customers—almost seven million more than the previous quarter. That’s not a small change. (Source: “Netflix cuts Q2 international forecast,” Broadband TV News, April 19, 2016.)
By next quarter, Netflix will have easily gained enough new subscribers to drive that number above 80 million. The subscribers add revenue. Forgetting quarterly figures, which can vary from season to season, all investors need to worry about is the fact that revenue grew 29.5% year-over-year.
A recent Pew Research Center report suggests that the migration of cable users to Netflix will be more intense than anyone could have expected. (Source: “Home Broadband 2015,” Pew Research Center, December 21, 2015.) The report presents one key statistic that should have Netflix investors salivating: some 24% of all U.S. adults don’t use satellite or cable. (Source: “The One Stat That Makes Netflix Stock a Buy,” NASDAQ, May 18, 2016.)
There is no going back. Cable replaced antennas and video streaming will replace cable. That’s why, even if Netflix is facing more competition from the likes of Hulu or Amazon or any number of similar services, it shouldn’t scare investors. After all, Ford stock didn’t suddenly cease growing after others in the U.S. and the rest of the industrialized world learned to apply the assembly line production system to build cars. As one famous philosopher once suggested: competition is good for markets.
Netflix stock, like many others, will go through its highs and lows, but its model and business are as ripe as they can be to capture the spirit of the times. It’s much more of a gamble to bet against Netflix than for it. Streaming is the future of entertainment and the future is arriving at a much faster pace than anyone could have expected.