Why I’m Buying Netflix (NFLX) on the Dip

W.Hen Netflix (NFLX) released their Q1 report after it closed yesterday, shocking many people. We got used to NFLX winnings along a pattern. They’ve missed bottom line expectations for the past four quarters, but also reported an impressive number of new subscribers, which resulted in a positive outlook. Sometimes this has resulted in an initial decline in the stock, as it did when the third quarter results were released in October, sometimes in a pop, as it did in January in response to the fourth quarter numbers. The result was a bumpy ride, but an overall sharp rise on the 1-year chart:

However, yesterday’s report turned all of that on its head. Earnings per share (EPS) exceeded expectations by an impressive amount, at $ 3.75 versus the expected $ 2.97. Revenue of $ 7.16 billion was also above consensus estimate, albeit with a lower margin than earnings. Where the problem occurred was in the new subscriber numbers. They reported a net worldwide subscription of 3.98 million subscribers, well below the forecast 6.2 million.

That is what prompted the stock to do so yesterday afternoon and this morning:

NFLX 5 day chart

That is an understandable reaction. New subscriber numbers have supported NFLX over the past year, even though they consistently fell short in terms of actual earnings. Growth was the driver, so disappointing growth provoked a negative reaction. The thing is, disappointing numbers are both easy to explain and easy to fix, there are positive results on the horizon, and NFLX is not valued at triple digit multiples like some growth stocks in this market do.

In short, this decline is a buying opportunity. At this point, in the interests of full disclosure, I should say that this is an opportunity I am taking and I will be NFLX for a long time by the time you read this.

It should really come as no surprise that net new subscribers fell more than any other quarter this quarter. Subscriptions were massively brought forward in the first half of last year when people began to accept that going out was interrupted for a while. That in itself would have resulted in a decrease, but there was something else, also related to Covid. New shows that go online now are usually made at the beginning of last year, at a time when no shows were made.

None of these things will last forever. It’s true that a large percentage of U.S. households already have a Netflix subscription, but contrary to what many American sports announcers seem to believe, the world doesn’t end at U.S. borders. Outside the Americas, there is enough growth opportunity to keep the stock moving for some time as new content starts streaming.

At times like these, the history of NFLX is well worth remembering. They started out as a DVD sales and rental company in 1997, shaking up this market by using mail instead of physical locations. When this was threatened, they saw the future and stepped on it, offering streaming services back in 2007 before most people knew what streaming was. In 2012 they started producing their own films and TV shows. By 2016 they were active in almost 200 countries.

In short, they are a company that has shown a truly remarkable ability not only to adapt to change and competition, but to actually make a living from it. Yes, there is tremendous competition now, but for most people, things like Paramount Plus, Peacock, and even Apple TV and Disney Plus are things they get on top of Netflix, not instead of Netflix.

Basically, and in a broader sense, stocks can occasionally wobble as traders and investors get nervous about new highs. However, until the Fed stops issuing investable cash and makes stocks seem like the best place for that cash by pushing interest rates down, the move down will remain momentary. We’re in one of those “shaky” places right now and retailers are looking for reasons to sell, which has likely exacerbated the negative reaction to Netflix’s profits. However, when sentiment improves again, growth will be back in vogue, as will the NFLX, making this decline a buying opportunity.

Do you want more from Martin? If you are familiar with Martin’s work, you will know that he offers the markets a unique perspective and actionable ideas from that perspective. In addition to writing here, Martin is also writing a free weekly newsletter with detailed analysis and trading ideas that focus on just one sector that has been performing poorly recently and is recovering quickly. To learn more and to sign up for the free newsletter, Just click here.

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

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