Netflix managers just announced subscriber growth is slowing. Bearish investors are high-fivin’ and saying the growth story is over. It’s not. They’re wrong, again. This is why you should always buy shares of the global streaming media company when it goes on sale.
After the close Thursday night, the global streaming media network reported mixed second quarter financial results. But it was the surprisingly weak guidance for future subscriber growth that tanked the stock 11%.
The company now expects 2.5 million new paying subscribers in the third quarter. Analysts, according to FactSet, were expecting 5.25 new members.
Investors have seen this movie before. They should know how it ends. Buy the stock.
The Los Gatos, Calif,-based company has always attracted skeptics. For more than a decade, naysayers have been telling the same story about out of control spending for content, expiring licenses, competition, pricing power and slowing subscriber growth.
Undoubtedly, many of these same debunked theories will make the rounds on financial TV on Friday. Bearish pundits will take a victory lap. And obliging interviewers will rationalize that Netflix shares were priced for perfection, anyway.
It’s a throwaway line. It’s also completely untrue.
Netflix shares have never been priced for perfection. It’s the reason the stock is up 5,235% since 2010. The stock has been, and continues to be, priced too cheaply. Too few investors understand the potential size of the business and Netflix’s unique competitive advantages.
In 1997, a tiny company in Scotts Valley, Calif., came up with a radical business model. The big idea was to use data to change the way average people consume media.
That company was Netflix. Founders Reed Hastings and Marc Randolph started with a humble DVD rent-by-mail website. It took off. However, growth caused a dilemma: The company didn’t have enough new releases in its inventory. So, company software engineers developed an algorithm based on members’ interests that de-emphasized popular titles. Genius.
New releases in 2006 represented less than 30% of Netflix new rentals.
As the company made the transition from mail order DVDs to streaming, Hastings, now chief executive officer, stepped up the use of data analytics and predictive modelling. The company built digital tools to learn more about what their customers wanted, then product managers built a new business model around developing and delivering that content at a fair price.
Netflix became a data analytics company. Streaming media is the application.
When I’m chilling on the sofa, scanning my Netflix queue, ecosystems are the furthest thing from my mind. But Netflix knows what summaries I’m reading, how long I spend surfing titles, what I ultimately watch, and for how long.
In the background, software is crunching all of that data to keep me engaged and to enhance my experience. Based on my behavior the algorithm may recommend the Mexican political thriller Ingobernable, the British police procedural Paranoid, the southern drug cartel thriller Ozark or even the animated Hollywood spoof BoJack Horseman.
The strategy is working. Through the ended of the second quarter, according to a letter to shareholders Thursday, Netflix had 192.9 million paid subscribers globally. All of those members are generating data that is being used to develop new content.
Competitors are not even in the ballpark. Amazon Prime, Disney+, HBO and Peacock may have parent companies with deep pockets, but they are way behind in terms of subscribers and original content. Moreover, without data analytics at their core, they are essentially playing a different game.
The last point is always overlooked by bearish investors.
Netflix as a business is not doomed by the loss of a license agreement for Friends or The Office, or price competition from Disney+, or even slowing subscriber growth.
Licensed content problems are like the new releases dilemma from 2006 all over again. Further, Netflix has raised prices five times since 2010. After every increase, paid subscriptions rose. Following the latest bump in January 2019, to $12.99 from $10.99, the company added about 26 million new members.
Although Netflix stock was hammered in afterhours trade Thursday, keep in mind that these declines happen about once a year, and shares are still about 5,200% higher since 2010.
Neglect the media talking heads today. When Netflix stock goes on sale you should buy it.