Netflix (NFLX) Adds New Content Driver As Subscription Growth Decelerates

Netflix's NFLX Q2 earnings hit the wire after the bell on Tuesday (7/20) with some indecisive price action in after-hours trading to a slide in Wednesday's session. A miss on EPS and subscription estimates, along with weak Q3 guidance, drove NFLX shares down over 5% lower immediately on the print. However, as investors and traders continued to study the quarterly report, they realized that they might be punishing this relatively discounted growth stock a little too harshly.

NFLX has traded sideways for over 52-weeks, just waiting for an upside catalyst, and despite some initially disappointing figures, there were positive underlying takeaways from this quarter.

A New Subscription Growth Driver

The most important announcement in this earnings report was related to Netflix's new gaming endeavor. Netflix had stated that it would be taking on the expanding digital gaming space and announced that former FB video-game executive Mike Verdu would be at the helm of this new venture earlier this month. The delivery of this new content segment was unclear until this report, which laid out its plan a little more clearly.

Netflix is in the early stages of game development, stating that the new mobile games would be included in Netflix's current subscription package with no additional costs. Here's what they had to say in their quarterly release: "We're also in the early stages of further expanding into games, building on our earlier efforts around interactivity (e.g., Black Mirror Bandersnatch) and our Stranger Things games. We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV. Games will be included in members' Netflix subscription at no additional cost, similar to films and series. Initially, we'll be primarily focused on games for mobile devices."

This could be the additional content driver that Netflix needs to propel its decelerating global subscription growth back into overdrive. 

The stock traded lower on Wednesday as investors weighed the potential subscription expansion with this division's increase to capital spending. NFLX went cash-flow positive for the first time in nearly nine years (when it began creating original content) last quarter, with 200+ million subscribers appearing to be the magic number for its enormous content creation budget to be sustainable. This content budget just grew with its gaming unit launch, and shareholders are trading it defensively on the implication that subscription appreciation may not outpace its content budget growth.

Final Thoughts 

Keep in mind that Netflix is still facing mounting competition in streaming as Disney+ DIS and HBO Max T take share. The gaming space is facing similar saturation with Google GOOGL, Microsoft MSFT, Apple AAPL, and Amazon AMZN all investing heavily.

If you believe in the Netflix narrative, you may consider jumping into the streaming king on this post-earnings dip. This quarterly report didn’t illustrate any systemic issues in either its results or forward guidance, and the additional topline driver only enhances its arsenal of consumer demanded content. NFLX is trading at its lowest valuation level in about a decade (since its streaming service took off) and sizably below most analysts' price targets. 

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