Markets

Why Netflix (NFLX) Remains a Stock Worth Holding

Netflix NFLX is down 7%+ in the pre-market (at the time of this writing), so it’s apparent that investors are concerned about its prospects. But it’s important not to lose sight of these facts-

On top line results- Netflix reported $6.15 billion in revenue in the June quarter, which topped the Zacks Consensus Estimate of $6.08 billion. This was nearly 25% higher than the year-ago quarter, and driven by strong subscriber growth of 25% and flattish average revenue per user (ARPU). ARPU grew 5% on an ex-FX basis.

As expected, the company clearly benefited from the work from home trend.

On subscribers- After adding 10.09 million subs during the quarter, which was better than the guided 7.5 million, subscriber adds in the first half totaled 26 million, slightly short of the 28 million added in full-year 2019. Total subs stood at 192.95 million.

Yes, third quarter guidance for 2.5 million subs was about half of what the street was expecting. But it shouldn’t be so unexpected given that the second quarter added about 3 million extra (and management did talk about subscriber pull-ins). Another positive was better-than-expected retention. This brings us to the question of whether retention will be as strong in the second half with more people going back to work and doing less binge watching.

On content- Netflix has said that it has completed most of the programming slated for 2020, which is probably the reason it can keep up the steady flow of fresh content. Production is back to normal levels in most places except North America, Brazil and parts of India.

Some of the more popular stuff it launched during the quarter included action movie "Extraction" starring Chris Hemsworth, comedy film "The Wrong Missy" starring David Spade, comedy series "Space Force" starring Steve Carell, unscripted dating show "Too Hot to Handle," as well as new seasons of "Money Heist" and "Dead to Me."

The real challenge will be in the first half of 2021 because releases slated for that period will be pushed back into the second half. That’s when we’ll have to compare with the competition to see if there’s a good enough reason for them to shift.

On price- The company’s ad-free model is an attraction for many and among the paid services, Google’s YouTube TV recently raised its monthly fee 30% to $65. Given the quality and breadth of content that Netflix offers, there’s scope for price hikes going forward. Netflix is likely holding off on that until acquiring fresh content becomes a necessity, possibly in the first half of 2021.

On competition- The slowdown in production is not restricted to Netflix alone. The whole industry is seeing it. But unlike some of the competition like Apple’s AAPL Apple TV, which doesn’t have a whole lot of content and Disney’s DIS Disney+, which is pretty much the new kid on the block (so also deficient on content), Netflix really is all set for 2020. There could be a drought thereafter, which will see it reach for the check book. We don’t know about Amazon AMZN yet.

To Sum Up

There was a huge miss on the bottom line although it included some big non-cash items. Its 60%+ debt-cap ratio wouldn’t be such a concern if the net cash wasn’t negative. But this is the name of the game for a growth stock like Netflix operating in the market that it does.

The new co-CEO is a content man, so that too feels positive since that’s where the growth will come from. Because although Netflix started out as a tech company, it’s increasingly growing into more of a content company. It’s doing all the right things, taking all the right measures and it does appear to be the best positioned among peers.

As such, its Zacks #3 Rank (Hold rating) seems justified.

 

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