Should You Buy Netflix Stock? 3 Pros, 3 Cons

What’s more important for Netflix stock? Slow subscriber growth, or double the profits?

NFLX stock - Should You Buy Netflix Stock? 3 Pros, 3 Cons

Source: Vivian D Nguyen via Flickr (Modified)

For a lot of stocks, losing 18% of value in a month would be a huge red flag. But for Netflix (NASDAQ:NFLX), that pain has been muted by the fact that NFLX stock still managed to gain 70% since the start of the year — more than 10 times better than the broader market.

The recent sell-off came after management described a “strong but not stellar” second quarter during which membership growth came in 1 million below the forecast. Let’s dig a little deeper, though, and consider three pros and three cons for Netflix stock.

NFLX Stock Pros

Everything else? While subscriber growth wasn’t able to clear th e high bar set during the second quarter, it’s not like the earnings report was completely horrifying. Revenue grew by 40%. While that was slightly worse than expected, it’s still 7 percentage points better than the growth posted during the same period last year. And net income tallied $384 million — the best figure in the last five quarters and heads and shoulders above the $66 million posted a year prior.

Content. Of course, the story for Netflix in recent years has been its impressive and award-winning push into original programming. This strength was most recently exemplified by the fact that the company took home more Emmy nominations (112) than anyone else this year. Netflix got nods for hits like The Crown, Stranger Things and Unbreakable Kimmy Schmidt. On top of that, though, it’s pushing hard into international programming, which could help the company find those new subscribers.

Growth. A company like Netflix is expected, in my opinion, to come with a little bit of froth. NFLX stock has been overpriced by traditional measures for years and it has still managed to post a sizzling run. After this sell-off, though, NFLX stock is trading for around 75 times forward earnings. That’s barely froth when you consider that the company is slated to post growth you won’t find anywhere else. Profits should more than double this year and should smooth out to annual growth around 63% over the next five years.

NFLX Stock Cons

Competition. One quarter of sub-par subscriber growth is so concerning to Wall Street for a simple reason: Netflix is the incumbent king of streaming. Thus, it arguably has more to lose than gain when it comes to subscribers — and there are plenty of other companies vying to steal away some eyeballs. Companies and services like Apple (NASDAQ:AAPL), Hulu, Amazon (NASDAQ:AMZN), AT&T’s (NYSE:T) HBO, etc., are all coming for Netflix stock’s throne. Indeed, the company itself said as much in the Q2 results.

Content costs. And while original programming has been the story of Netflix over the last few years, the sub-plot has been hand-wringing over just how much it costs to make original shows and movies (spoiler: it costs a lot). The companies liabilities more than doubled between 2014 and 2017, tallying around $5.5 billion last year. Translation: Award-winning content doesn’t come cheap.

Too much hype. Perhaps the biggest con for NFLX stock, though, has been voiced by numerous writers and analysts of late: The concern is that shares have risen on hype for so long that there’s simply no way the company can live up to it. Even good news could be already baked in to NFLX stock; UBS lowered its rating on the stock for that very reason before the recent post-earnings slide.

Bottom Line on Netflix Stock

Despite the pullback, I think there’s more upside to Netflix stock. I think the sell-off has offered nice consolidation for the stock and helped reset expectations. And the bottom line is that it’s hard to argue with a growing bottom line. I believe the company’s investment in programming will continue to pay off with enough new subscribers to keep upward momentum for shares.

As of this writing, Robert Martin was long AAPL.

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