Monday, October 25, 2021
ADVERTISEMENT

Netflix Stock – 3 Positives from Netflix‘s Disappointing Earnings

Netflix (NASDAQ:NFLX) is suffering a hangover from 2020 that’s worse than anyone anticipated. The streaming leader added just 4 million subscribers in the first quarter, and management expects to add a paltry 1 million this quarter. Netflix‘s own guidance was for 6 million first-quarter net additions, and Wall Street analysts previously expected Netflix to add 4.4 million subscribers in the second quarter.

But long-term investors can still find some silver linings in Netflix‘s earnings report. Here are three important ones to note.

A reception desk with the <a href=Netflix logo on the wall behind it.” src=”https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F622330%2Fnetflix-front-desk-singapore.jpg&w=700&op=resize” srcset=”https://g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/622330/netflix-front-desk-singapore.jpg&w=300&op=resize 300w, https://g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/622330/netflix-front-desk-singapore.jpg&w=1000&op=resize 1000w, https://g.foolcdn.com/image/?url=https%3A//g.foolcdn.com/editorial/images/622330/netflix-front-desk-singapore.jpg&w=2000&op=resize 2000w”/>

Netflix offices in Singapore. Image source: Netflix.

1. Lower subscriber churn

Netflix‘s slow subscriber growth isn’t a result of members canceling the service. CFO Spence Neumann said Netflix‘s churn rate — the percentage of customers canceling service each month — declined year over year in the first quarter.

That’s particularly noteworthy for several reasons. First, after a year of sitting on their couches streaming Netflix every night, the surge in subscribers from 2020 is sticking around. COO Greg Peters previously said the 2020 cohort looks similar to pre-COVID subscribers, but it’s good to see “Netflix fatigue” hasn’t set in for most.

Second, Netflix raised its pricing in several markets over the last few months. In fact, average revenue per user increased year over year in every region on a foreign-exchange neutral basis. During the company’s first-quarter earnings call, Neumann said: “Our churn is actually below pre-price change levels already in the U.S. and in most of the markets and where we’ve — where we have adjusted prices.”

Finally, Netflix faced a lot more competition in streaming last quarter than it did a year ago. Several high-profile streaming services launched or expanded to new markets over the last 12 months. Nonetheless, Netflix hasn’t found any noticeable effect from competition, particularly when comparing subscriber growth in regions with and without key competitors.

What this means for investors is that the dip in subscriber growth is truly a result of the pull-forward Netflix had been referencing since the start of the pandemic. The fourth-quarter results may have given hope that subscriber growth could continue to outperform, but things finally caught up to Netflix. In the long run, however, it means Netflix should be able to keep adding subscribers at similar levels to pre-pandemic years. Indeed, management expects subscriber growth to normalize in the second half of the year.

2. The share buyback starts now

Management shared great news for investors in January, noting it expects the company to start generating positive free cash flow on a consistent basis. Management planned to use the extra cash to keep its debt at a certain level (between $10 billion and $15 billion), keep a bit of cash on hand, and put the rest toward share repurchases.

After generating another $692 million in free cash flow during the first quarter, management paid off its $500 million 5.375% Feb. 1, 2021 bond. The board approved a $5 billion stock repurchase program (with no expiration), and management expects to begin exercising it this quarter.

Share repurchase programs can be a great way for companies to return excess cash to shareholders without becoming beholden to a dividend. That gives management the flexibility to buy back shares when the stock appears undervalued or invest in other opportunities to grow the business when they present themselves. Considering Netflix is at the very early stages of becoming free cash flow positive again, the size of the repurchase program and management’s eagerness to exercise it is a great sign of management’s confidence in the business.

3. A modest increase in content spending

Management shared its plans to spend around $17 billion in cash on content this year. It spent about $12.5 billion last year due to production shutdowns, but it spent $14.6 billion in 2019. That puts its two-year compound annual growth in cash content spending at around 8%.

That’s notable because it may give Netflix investors a glimpse at the future cash flows of the company. Content accounts for the bulk of Netflix‘s cash outlay. Therefore, consistent sub-10% growth in content spending plus greater than 20% annual revenue growth equals a whole lot of cash. For reference, Netflix revenue increased 24% in the first quarter.

Cash spending should increase throughout the year, as productions are still ramping up in some parts of the world, but the overall trend is for slower growth in content spending than in years past. With subscriber growth expected to reaccelerate in the back half of the year and most members willing to absorb continued price increases, revenue should be able to continue outpacing cash spending. That should give investors some confidence in the FAANG stock even if the near-term results are disappointing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Fintech Zoom premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



Netflix Stock – 3 Positives from Netflix‘s Disappointing Earnings

Tags: Netflix Stock
Stock Market, Latest News on C N N.