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It’s About Time to Stop Fighting the Netflix Stock Trend


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Sometimes, the best investment is the one that just goes with the trend. For all that contrarian investors have tried to explain that Netflix (NASDAQ: NFLX ) valuation is stretched, that it's time is up, Netflix stock has continued higher.

nflx stock netflix stock Source: Via Netflix

At the time of writing, valuations do look extreme at 135x earnings, but Netflix stock has run over those who have been caught short. Short-sellers may have very cogent theses and numerous reasons why Netflix stock is overvalued, but the price action over the past couple of years has put them in their place.

The reality is that fighting the trend has been a losing proposition. YTD, Netflix stock performance has been stellar: up 42 percent, compared to the NASDAQComposite's 26 percent.

The FAANGs have stymied many value-oriented investors, and Netflix is no exception. Even now, its ascent skyward seems to show few signs of slowing.

Netflix's Solid First Quarter

Subscribers is the metric the market seems to care most about. Free cash flow, content spend, and even margins have taken a backseat to subscriber growth. On this front, Netflix is delivering. In the first quarter , average streaming paid memberships increased 26% year over year.  Excluding F/X, global streaming ARPU improved 3% year over year. This ultimately drove revenue growth of 22 percent.

Paid net adds clocked in at 9.6 million. The US and international breakout is 1.74m and 7.86m, respectively. In aggregate, this 16 percent year-over-year increase set a quarterly record. For the first half of 2019, that gets Netflix to 14.6m paid net adds, up 7% year over year.

The subscriber growth and price increase have been major factors in supporting the movement in Netflix stock and could continue in the second half of the year with new content being released.

Netflix Takes on the World

The international business growth is worth paying close attention to. It's been the crux of many bear arguments. The idea is that the international market is fragmented due to different cultures with different tastes making it hard to compete with a small content library. There is a belief that regional competition will eat Netflix for lunch but that just hasn't happened.

Netflix has gotten in early and continuously iterated their platform. They've learned about content that plays well and content that doesn't in local markets. The result is that, from a long-term standpoint, it's very likely that international business eclipses the U.S. business.

With such a strong platform and compelling content, Netflix has been able to roll out price increases across the U.S., Brazil, Mexico and parts of Europe. It doesn't take a business school degree to know that pricing power is important and indicative of the durability of a brand.

Demand for Netflix's high quality English-language content remains strong. The international business doesn't require much capital investment to scale across new markets, reducing that expansion risk significantly. Simply put, the risk/reward is very much in NFLX's favor. Given the size and growth profile of the international markets, there is huge value for NFLX to continue investing in them.

With a "strong slate of global content in the second half of the year," it's reasonable to expect a year of record annual paid net adds.

Netflix Stock and the Virtuous Cycle

As Netflix increases its content budget and their marketing strategies become more efficient, they can get more subscribers to the service. More global subscribers who are more engaged means richer valuation for Netflix stock.

As of the most recent quarter, Netflix has hit nearly 150m paid members. With continued success in programming and a large global addressable market that can absorb new competitors like Apple  (NASDAQ: AAPL ), it's a risky proposition to bet against the primary disruptor of linear television.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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The post It's About Time to Stop Fighting the Netflix Stock Trend appeared first on InvestorPlace .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing
Referenced Symbols: AAPL , NFLX



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