Netflix isn’t dead yet: 3 reasons to bet on its comeback – Nasdaq | Candle Made Easy

Coming in its second quarter earnings report, Netflix (NASDAQ:NFLX) had already been written off by many financial media.

The company reported a surprise drop in subscribers in the first quarter and then lost another 1 million members in the second quarter. Even after better-than-expected Q2 numbers, the stock is still about 70% down from last fall’s peak, showing how much investor confidence in the stock has been lost.

While Netflix does facing some challenges doesn’t mean the stock is a dud. In fact, the sell-off could be an excellent buying opportunity. Read on to see three reasons to keep faith in the leading streamer.

1. Revenue growth is still solid

Two back-to-back quarters of subscriber declines have been the headlines, but even if Netflix is ​​seeing a modest subscriber decline, it’s still delivering solid year-over-year revenue gains on price hikes and subscriber gains.

In the second quarter, revenue rose 9%, or 13% in constant currency, as a strong dollar lowers the value of Netflix’s international earnings. With 13% growth, Netflix may not be the hot growth stock it once was, but it’s also not one of its legacy media rivals struggling to grow revenue as they swap cable subscribers for streaming subscribers.

Investors also need to keep in mind that the company and the broader streaming industry are facing cyclical headwinds following the streaming boom at the start of the pandemic. That will eventually fade away.

Third-quarter guidance called for modest subscriber growth of 1 million. Again, that’s not enough to excite growth investors, but it does show that the company is moving in the right direction.

2. Profits are strong

Critics have slammed Netflix’s business model for burning too much money and having an unsustainable content budget. However, the company is in a very different position today than it was a few years ago. Under generally accepted accounting principles (GAAP), operating margins are now around 20%, and management expects them to continue to grow, albeit not as quickly as originally forecast.

The company is also profitable on a free cash flow (FCF) basis and expects to generate $1 billion in free cash flow this year. It also sees FCF margins converging with operating margins as content spend growth is moderated.

In other words, the worst-case scenario for Netflix appears to be that it’s a slow-growing, highly profitable leader in the streaming industry. That’s not a bad position at all, especially for a stock trading with a price-to-earnings (P/E) ratio of less than 20.

3. Advertising could be a big winner

Netflix has fought off advertising for several years, but hard times have forced the company to reevaluate its business model. After announcing a plan to launch an advertising tier earlier this year, Netflix is ​​moving fast and partnering with Microsoft start early next year.

Ads could prove to be a big moneymaker for the streamer. It has 220 million subscribers around the world and detailed data on the viewing habits of its subscribers. Both factors make it a highly desirable platform for advertisers. Additionally, Netflix has disrupted the ecosystem of advertisers in linear TV, and brands are hungry to replace that. So Netflix is ​​a natural partner.

Netflix has also proven its ability to deliver eyeballs. In fact, the company had far more total minutes watched in the US than any other network or streaming service. At 1.3 trillion minutes, it had nearly as many as CBS and NBC, the #2 and #3 most watched services combined.

The company’s conundrum at this point is that it excels at getting viewers to spend time on its service, but it has no way of monetizing that time since users who barely watch Netflix are paying that much like someone who sees it three hours a day. Advertising allows it to take advantage of this as it can sell ads according to the time spent viewing the service. The advertising business could be stronger than expected. Hulu, which offers both ad-free and ad-based tiers, has at times generated more revenue per user with its ad-based tier, and the same could be true for Netflix.

2022 will go down in history as a challenging year for the streaming leader, but 2023 could be the start of a serious comeback. With the rollout of the advertising tier, an expected improvement in free cash flow margin, and reduced cyclical headwinds from the pandemic hangover, Netflix is ​​likely to be in a better position a year from now.

10 Stocks We Like Better Than Netflix
When our award-winning team of analysts have a stock tip, it can be worth listening. After all, the newsletter they’ve been running for over a decade is Motley Fool stock advisorhas tripled the market.*

They just revealed what they think are the top ten stocks investors can buy right now… and Netflix wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Check out the 10 stocks

*Stock Advisor returns from June 2, 2022

Jeremy Bowman has positions at Netflix. The Motley Fool has positions in and recommends Microsoft and Netflix. The Motley Fool has a disclosure policy.

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

Leave a Comment