After many quarters of rapid growth, Netflix (NASDAQ:) is taking a break. The streaming entertainment giant is on track for its year of growth since 2013, a sudden turnaround that is making its investors nervous.
The company added just 1.54 million customers in the second quarter ended June 30. Coupled with new customers in the first quarter, Netflix saw an escalation of approximately 5.5 million customers — the worst subscriber performance since the first half of 2013, when the service operated in less than half of the countries it currently does business in. does.
The Los Gatos, California-based communications services heavyweight attributes its recent results to accelerated growth from a year ago, when nearly 26 million new customers signed up to Netflix in the first half. That was a time when people were stuck at home during the pandemic and flocked to the movies and shows.
The company also told investors last month that it expects 3.5 million subscribers in the third quarter, far fewer than 5.86 million analysts had expected.
This weak growth outlook is keeping many investors on the sidelines and making them uncertain about the company's prospects in the post-pandemic environment. Netflix stocks barely rose this year or the benchmark index is up more than 16%.
Is this underperformance of one of the most innovative media companies of our time a worrying sign for long-term investors or those looking to bet on the stock now?
In the short term, Netflix may continue to underperform as subscriber growth slows after huge gains during the pandemic. But in the long run, Netflix's superior position in the video streaming market is intact and any further weakness should be seen as a buying opportunity in our view.
Here are three key catalysts that support our positive case for Netflix despite its recent weakness:
1. Global reach
The strongest argument for Netflix's optimistic stance is the company's growing global reach. Although it has signed up about half of its potential customers in the US, it is still a minor player in many markets in Asia, Africa and Eastern Europe. The Asia-Pacific region, NFLX's smallest location, has brought in the most new customers this year.
Netflix has signed 209 million of what it says are the 800 million to 900 million households that have broadband internet or pay TV. The company thinks it will sign up more than half of those people. Not only will it continue to grow in places like Asia-Pacific and Latin America, but it will also continue to grow in the US, Canada, and Western Europe.
Netflix' global subscription pressures are fueled by the company's expertise in the content preferred by the domestic audience, and by knowing what marketing they are responding to. In addition, the company produces more local content than any of its competitors. After making much-watched Asia programs last year, such as the Korean zombie thriller 'Kingdom' and reality series "Indian Matchmaking," Netflix is ??spending more money in Asia to secure exclusive content. Since its launch in Asia in 2015, Netflix has released more than 220 original titles there.
Netflix's non-English titles were also popular this year, not just in their home country, and attracted a wide audience. “Lupine” from France, “Elite” from Spain and “Who Killed Sara?” from Mexico – they were all huge hits.
Netflix co-CEO Reed Hastings estimates that international markets could one day make up 75-80% of his company's user base, comparable to Facebook (NASDAQ:) and Google (NASDAQ:).
2 . Improving Financial Statistics
If the battle in the post-pandemic world is to keep subscribers from canceling their subscriptions, it's clear that Netflix remains well positioned to win this race.
According to Parrot Analytics, despite the decline in subscription demand in the second quarter, Netflix's churn rate has remained low globally compared to its competitors, indicating the importance of a balanced library of originals and licensed content.
Another positive development for long-term investors is that Netflix is ??no longer dependent on debt to fuel its growth. After years of borrowing to fund production, Netflix has said it no longer needs to raise outside funding to support its day-to-day operations. The company plans to reduce its debt burden and will repurchase up to $5 billion in shares.
According to research by the Bank of Montreal, Netflix has solidified its position as the leader in streaming video and the stock price should recover strongly in the coming months.
In a recent note BMO said:
"We think a strong 2H content slate can help NFLX lead by choppy reopening trends, while management continues to lean on share buybacks and support the stock. With difficult compositions under way and FCF gains despite early investments in video games, we think investors should aggressively build positions again.”
Netflix Consensus Estimates.
Chart: Investing.com
The strengthened financial situation of Netflix keeps the analyst community positive about the stock. In an Investing.com survey of 42 analysts, 32 analysts have a buy recommendation for the stock, with a 12-month consensus target of $610.49.
3. Entering the Gaming Market
Taking advantage of its large global subscriber base, Netflix is ??working to diversify its revenue streams beyond video content and add games to its subscription offering.
According to Newzoo BV, global consumer spending on game software is expected to reach $175.8 billion this year and exceed $200 billion by 2023. According to a report in the Wall Street Journal, mobile games — the kind Netflix is ??expected to focus on — are on track to catch up to about half of this year's revenue.
Benchmark analyst Mike Hickey said in the report that the addition of games will make the Netflix service stickier. Hickey said:
"You can burn through a TV series in a day, but you can spend months or years on a game constantly."
According to a Deloitte study, Generation Z ranked video game playing as their favorite entertainment activity, far above music, social media and television. To kick-start this project, Netflix hired Mike Verdu, a former director of video game publisher Electronic Arts (NASDAQ:) and Facebook, as vice president of game development.
“We see gaming as another new category of content for us, similar to our expansion into original movies, animation and unscripted TV. Games will be included in members' Netflix subscriptions at no additional cost, similar to movies and series," Netflix told investors in its latest quarterly letter.
Starting point
There is no doubt that Netflix's pandemic-era subscriber growth is over as the economy reopens and people try to resume normal activities. But the streaming company has emerged from the unique environment of the past year much stronger, strengthening its cash and market positions. A few weak quarters should not, in our view, be taken as a sell signal.
