Say hello to the era of internet entertainment. Everyone is cutting the cord, and they are all migrating to over-the-top streaming platforms. That is great for Netflix, Inc. (NASDAQ:NFLX), who just reported another quarter of much-better-than-expected sub growth.
But NFLX stock, which traded higher after hours, is actually in the red in early Tuesday morning trading. A failure to trade higher on exceptional numbers is usually a sign of a maxed out valuation.
That doesn’t look to be the case here.
While there are risks related to the NFLX bear thesis (content spend just keeps going up, cash burn remains a problem, competition is coming in a big way soon, and the valuation remains rich), the core reason to own NFLX stock remains intact.
Netflix continues to grow its leadership position in a secular growth market, giving the company a bullish, robust growth trajectory for many years to come. That robust growth will allow NFLX stock to earn healthy returns on its current high content spend rate, turn cash burn into cash flow, mature alongside competition, and gradually grow into its valuation.
Put it all together, and NFLX stock should keep heading higher.
A Deeper Look Into Netflix’s Quarter
Netflix had another exceptional quarter. Domestic streaming net adds (850,000) came in above expectations (774,000). Same with international streaming net adds (4.45 million versus expectations for 3.72 million). Year-to-date, net adds are 15.5 million, up 29% versus last year.
That is pretty impressive, considering Netflix isn’t anything new. It has actually been around for a while.
So why is the Netflix growth narrative all the sudden accelerating this year? Two big reasons.
One, the internet entertainment space is actually picking up momentum. Whereas some believed that the shift from linear to internet TV would moderate, it has actually accelerated. More people than ever are dropping cable packages and picking up Netflix-like services.
Two, Netflix remains the default option for cord-cutters due to its robust portfolio of original content. This is the more critical trend at play here. Ever since Netflix doubled down on original content, subscriber growth numbers have boomed.
These two tailwinds will remain in play into the foreseeable future, guaranteeing NFLX robust growth numbers for multiple years.