Since its latest earnings report, Netflix (NASDAQ:NFLX) stock has made up for some lost ground. Even so, the shares are still 15% off its 52-week high.
There are certainly some nagging issues. Perhaps the most important one is the sub-par performance in the membership base for the second quarter. It actually missed expectations by over 1 million. The result was a double-digit plunge in NFLX stock.
Meanwhile, the competitive environment is getting much more intense. Traditional media operators like Disney (NYSE:DIS) and CBS (NYSE:CBS) are ramping their efforts. Of course, there are also the threats from the tech giants, such as Amazon.com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL).
Finally, Netflix stock is far from cheap. Keep in mind that the valuation is at 83 times forward earnings.
So what now for NFLX stock? Well, despite all the challenges, I still think the bull case is still in force and the recent weakness is an opportunity. Let’s see why:
Netflix Stock Advantage: Cord-Cutting Mega-Trend
There are far-reaching disruptive changes occurring with media consumption. A big part of this is due to the ubiquitous use of smartphones. But there is also a backlash against the high fees for cable fees. The bottom line is that cord-cutting has become a mega-trend. Based on data from eMarketer, about 50 million of Americans will abandon cable and satellite TV by 2021, up from 20 million this year.
But the growth is not just here in the US. Millions of people across the world are also giving up their cable fees. Note that NFLX has 72.8 million members outside the US.
According to InvestorPlace.com’s Luke Lango: “The shift from linear to internet media consumption is a mega-trend that is taking over the United States. Eventually, it will take over the world, as well.”
Netflix Stock Advantage: Scale
Netflix has a major lead in the streaming business, with a massive subscriber base of 130.1 million. If anything, the company has become synonymous with streaming.
This branding advantage is critical in consumer businesses, which can be fickle. It also helps that the service is quite affordable. This actually makes it tough for someone to decide to nix the service.
With its scale, even small changes can have an outsized impact on the top-line. After all, the recent price changes have helped to improve revenues.
Something else: Netflix is looking at ways to avoid having to pay the transaction fees for the appstores of Apple and Google. The strategy is to send users to a web page. If this proves successful, it could definitely move the needle. Consider that Apple and Google take a 30-percent cut.
Netflix Stock Advantage: Premium Content
It’s a cliché but true: “Content is king.”
This has certainly been the case for Netflix. Its bold investments in quality content has been a key factor in driving growth. Ironically, when the company started this strategy, there was quite a bit of skepticism.
It’s true that creating content can be expensive and dicey. The entertainment industry is full of examples of big-time duds.
And while Netflix has had its misses, the company has been mostly on target — and knows how to churn out hits, such as To All The Boys I’ve Loved Before. Note that the company plans to launch 80 movies this year.
It definitely helps that Netflix has a large platform and expertise with analytics. All in all, these are the kinds of advantages that are extremely difficult for competitors to replicate.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
