Netflix is ​​not dead yet: 3 reasons to bet on its return

VSoming in its second quarter earnings report, netflix (NASDAQ:NFLX) had already been written off by much of the financial media.

The company reported a surprise drop in subscribers in the first quarter, then lost another 1 million members in the second quarter. Even after a rise in better-than-expected second-quarter numbers, the stock is still down around 70% from its peak last fall, showing how much confidence investors have lost in the stock market. stock.

While Netflix Is face challenges, it doesn’t mean the stock is a dud. In fact, liquidation could be a great buying opportunity. Keep reading to see three reasons to keep faith in the first streamer.

1. Revenue growth remains solid

Two consecutive quarters of declining subscribers have grabbed headlines, but even though Netflix is ​​seeing a modest decline in subscribers, it continues to deliver strong revenue gains due to price increases and subscriber gains from one year to the next.

In the second quarter, revenue rose 9%, or 13% in neutral terms, as a strong dollar reduced the value of Netflix’s international revenue. With 13% growth, Netflix may no longer be the hot growth stock it once was, but neither is it one of its legacy media competitors struggling to increase their revenue by trading cable subscribers for streaming subscribers.

Investors should also remember that the company and the entire streaming industry are facing cyclical headwinds following the streaming boom at the start of the pandemic. It will eventually fade.

The third quarter forecast called for modest subscriber growth of 1 million. Again, that’s not enough to delight growth investors, but it shows that the company is headed in the right direction.

2. Profits are strong

Critics have criticized Netflix’s business model for spending too much money and having an unsustainable content budget. However, the company is in a much different position than it was a few years ago. Based on generally accepted accounting principles (GAAP), its operating margins now hover around 20%, and management expects them to continue to grow, but not as quickly as it had. intended.

Based on free cash flow (FCF), the company is also profitable and expects to generate $1 billion in free cash flow this year. It also sees FCF margins closing in on its operating margins as it moderates growth in its content spend.

In other words, the worst-case scenario for Netflix seems to be a slow-growing, highly profitable leader in the streaming industry. Not a bad position at all, especially for a stock that trades at a price-to-earnings (P/E) ratio of less than 20.

3. Advertising could be a big winner

Netflix resisted advertising for several years, but tough times forced the company to reevaluate its business model. After announcing an ad-tier launch plan earlier this year, Netflix is ​​moving fast by partnering with Microsoft launch early next year.

Advertising could prove to be an important source of income for the streamer. It has 220 million subscribers worldwide and granular data on the viewing habits of its subscribers. These two factors make it a highly desirable platform for advertisers. Additionally, Netflix has disrupted the advertiser ecosystem in linear TV, and brands are hungry to replace it. Netflix is ​​therefore a natural partner.

Netflix has also proven its ability to deliver eyeballs. In fact, in the United States, the company had far more minutes watched than any other network or streaming service. With 1.3 trillion minutes, it had almost as many as CBS and NBC, the 2nd and 3rd most-watched services combined.

The conundrum for the company at this point is that it’s great at getting viewers to spend time with its service, but it has no way to monetize that time since users who barely watch Netflix pay as much as anyone. ‘one who watches it three hours a day. . Advertising allows her to profit from this because she can sell advertisements based on the time spent watching the service. Advertising activity could be stronger than expected. Hulu, which offers both ad-free and ad-based tiers, has at times generated more revenue per user from its ad-based tier, and so could Netflix.

2022 will be a tough year for the streaming leader, but 2023 could be the start of a serious comeback. With the launch of the advertising level, an expected improvement in free cash flow margin, and a decrease in the cyclical headwinds of the pandemic hangover, Netflix should be in a better position in a year.

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Jeremy Bowman holds positions at Netflix. The Motley Fool holds positions 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.

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