3 Silver Linings in Netflix's Rough Quarter
The pain is real for Netflix (NASDAQ: NFLX) shareholders. The stock plummeted 22% on Friday after the company posted disappointing financial results. A weak quarter and a gloomy near-term outlook are raining on the streaming party.
There's a lot of bad news to unpack, but it wasn't all negative. Let's go over a few of the things investors can look forward to after an unimpressive earnings report.
Image source: Getty Images.
The price increase will help
One of the mysteries heading into last week's financial update was the timing of the price increase Netflix rolled out to its U.S. users six days earlier. If Netflix had delivered a blowout quarter, the increase would've been easy to explain. Netflix was rolling, and pushing through its sixth price increase in eight years would have just been a matter of flexing its pricing elasticity. We now know the truth: Netflix is desperate.
It didn't boost its price because it can keep drawing in new subscribers. They're not coming right now, even at the old price. The game is maximizing what it can get out of existing subscribers instead of trying to win over new ones. That's not good news, but if Netflix's aim is true, it will improve its profitability. The increase will let Netflix keep spending heavily on content even as subscriber growth slows, if not stalls completely. It will lose some users, but probably less than the amount of money it will make in the U.S. with last week's 11% price surge.
There was an upgrade in the deluge
Like a salmon swimming upstream, there was a surprising analyst upgrade as most Wall Street pros were slashing price targets and downgrading Netflix. Matthew Harrigan at Benchmark boosted his rating from sell to hold, responding to the selloff after the weak guidance for the current quarter.
Harrigan's neutral call may not seem like much of an upgrade. He still thinks the stock may be merely marching in place through the first half of the year, given the weak near-term growth prospects. His estimate of fair value is $450, 13% higher than it was at the end of last week's selloff. However, it's notable that this was a bear changing his tune.
New levers can thrive in the shade
There's more to Netflix than just video content these days. There were a pair of interesting launches last year. Netflix rolled out an online merchandise store in June. In November, it entered into mobile gaming, and by the end of 2021 it had 10 different gaming experiences based on its properties on Android and iOS. It expects to expand its mobile gaming offerings in both casual and core gaming genres.
Both young initiatives make sense. Netflix is entertaining a growing audience. It's the ultimate tastemaker of pop culture. So why can't it succeed in exploiting the merchandising and gaming opportunities behind its big hits on the small screen? The e-commerce platform seems to be taking the back seat to gaming opportunities in the near term, but they will both loom larger as Netflix drivers in the future. Netflix will always be a streaming services stock first, but the future is bright as it becomes a better-rounded entertainment giant. The stock took a step back last week, but the business model certainly didn't.
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Rick Munarriz owns Netflix. The Motley Fool owns and recommends Netflix. The Motley Fool has a disclosure policy.
