Netflix (NFLX) is one of the most volatile players on Wall Street. Although NFLX stock is up 60% in the past 12 months, the streaming video giant has had plenty of ups and downs in that time frame.
Most recently, Netflix stock had an ugly March where the stock gave up more than 20% in less than 30 days … but from early May to June, NFLX made all of it back.
Now, NFLX stock fireworks are going off after Netflix earnings showed double the profits, and the company boasted 50 million subscribers. However, CEO Reed Hastings also revealed that aggressive expansion in Europe will slash profitability going forward. In fact, as of this writing, Netflix stock is actually down about 5% from its earnings report.
But will the sellers win this tug of war in the months ahead? Is it time to cash out NFLX stock, or is this just one more pause before another leg up?
I think it’s the latter.
See, Netflix has had plenty of knee-jerk reactions like this before, none of which have ever held the stock back materially in the medium term. Some examples include:
- Negativity over the impact of Netflix price increases a few months ago.
- Fears of an unholy alliance between Apple (AAPL) and Comcast (CMCSA) on a set-top box.
- Competition from Amazon (AMZN), which has been turned up thanks to an alliance with HBO on content.
And, of course, fears that earnings will not keep moving higher to justify the valuation.
Q2 Netflix earnings have put a lot of those fears to rest. The numbers were impressive on several fronts, including NFLX earnings of $1.15 per share that doubled last year’s figures and revenue growth of more than 25% in the face of competition and price increases.
Sure, margins in Europe stink right now and Netflix stock investors have to be OK with a reversal in this impressive earnings growth — something short-term momentum traders have no interest in. And sure, I’ve lamented the unprofitable expansion into Europe a lot over the years myself.
But from a user growth perspective, the potential is enormous. According to Netflix financials…
- At the end of 2011, NFLX had 1.4 million paid international subscribers and generated $82.9 million in international streaming revenue.
- At the end of 2012, NFLX had 4.9 million international subscribers and generated $287.5 million in revenue.
- At the end of 2013, NFLX had 9.7 million international subscribers and generated $712.4 million in revenue.
If Reed Hastings is accelerating growth in 2014 beyond even this impressive pace, it’s hard to see that as a net negative for long-term investors in Netflix stock.
So if you’re bullish on Netflix regardless of the volatility that might set in over the next few weeks, make your purchase of NFLX stock.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.