On Tuesday, Netflix (NASDAQ:NFLX) reported its third-quarter earnings. The streaming giant fell short on new subscriber targets after blowing past expectations in the first two quarters of the year. Netflix stock is down in after-hours trading, continuing a slide that began a week ago. Last Tuesday, NFLX closed at $554.09, marking the point where it had almost fully recovered from September’s tech stock selloff, but it has been downhill since.
At this point, you can join the naysayers who worry that Netflix is hitting a growth wall.
Or, you can join those who think that Netflix stock could nearly double over the next two to three years.
If you’re in the latter camp, the current dip in Netflix over the third-quarter subscriber miss is an opportunity to pick up shares at a discount.
Netflix Q3 Showed Slowing Subscriber Growth
During the first two quarters of 2020, Netflix was the beneficiary of turbocharged subscriber growth thanks to the new pandemic. People stayed home and streaming video was cheap entertainment. In the first quarter, that resulted in 15.8 million new paid subscribers — nearly double what Wall Street was expecting. In Q2 that was 10.1 million added, compared to 2.7 million the year before.
Netflix warned in the second quarter that subscriber growth would slow in the second half of the year. It forecast 2.5 million new subscribers in the third quarter. Wall Street was more optimistic, looking for 3.3 million.
The reality was less than both projections, with 2.2 million new paid subscribers added, globally. In addition, earnings per share of $1.74 (up 18% year-over-year) were lower than the $2.13 analysts were looking for.
On a more positive note, revenue of $6.4 billion was up 23% YoY and the company is forecasting 6 million new subscribers for the fourth quarter. That wasn’t enough to keep Netflix stock from taking a beating in after-hours trading, however.
Concerns Over Competition
There is additional angst over the increased competition Netflix is facing these days. The company no longer has the streaming market to itself. 2019 marked an escalation and the beginning of the so-called “streaming wars” with media and tech giants entering the race to dethrone Netflix. Despite some big subscriber gains by competing services, Netflix isn’t particularly feeling the heat.
With its first-arriver advantage, and years to build up its in-house media library, Netflix is in a pretty solid position.
And the reality is that consumers have been quite content to pay for multiple streaming video subscriptions. Compared to cable, streaming video services are cheap. Not as cheap as they were in the early days — Netflix once cost just $7.99 per month — but still cheap enough that most consumers don’t feel the need to whittle their subscriptions down to just one.
A recent survey of American households found that 49% currently subscribe to three or more streaming video services.
There will always be some churn, but I think that Netflix is safe from losing subscribers en masse to the competition.
Bottom Line on Netflix Stock
Netflix is a Portfolio Grader ‘A’ rated stock, and with good reason. Even in a quarter that disappointed Wall Street, sending Netflix shares down, the company still posted earnings per share of $1.74 and $6.4 billion in revenue. And I should note that even after those first- and second-quarter earnings reports, with their massive subscriber growth numbers, the shares were still hammered immediately after. But the stock recovered as cooler heads prevailed.
Despite its latest weeklong slide, Netflix stock is still up nearly 60% in 2020. And if a growing number of investment analysts are rating the stock as a Hold these days, a Buy recommendation remains much more likely. The 43 analysts tracked by CNN Business have a median 12-month price target of $570, which offers over 15% upside. One bull has a $670 price target. That’s a little optimistic, but I agree with the sentiment: Netflix bears are too fixated on this quarter’s subscriber letdown and the headlines made by streaming competitors.
Netflix is here for the long term, and the stock is going to continue to deliver long-term growth — even if subscriber growth can’t keep up with the breakneck pace set early in the pandemic.
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Source: Investor Place