3 Reasons Why Netflix Stock Is a Buy Ahead of Q3 Earnings

A smart management team and a compelling content library are among key drivers for NFLX stock

Despite Disney+ risk, Netflix stock looks strong heading into Q1

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We all know that the future of entertainment is digital. Yet the king of content streaming, Netflix (NASDAQ:NFLX), hasn’t felt much love from the markets recently. While Netflix stock has soared 78% since the beginning of this year, the second half is a different story.

Since the beginning of July, NFLX stock is currently down more than 13%. A rally that started around mid-August appeared promising, but has lately petered out. That has worried some shareholders, as NFLX competitors like Amazon (NASDAQ:AMZN) — and indirectly AT&T (NYSE:T) and Disney (NYSE:DIS) — have found momentum in the second half.

Weakness in the Netflix stock price has also contradicted bullishness in the broader Nasdaq Composite up until recently. This has caused some technical analysts to raise the alarm on NFLX, warning that further pain is likely. The main reason is that shares have not convincingly moved past key resistance levels.

Adding to the tensions is that the company’s third-quarter earnings report is just around the corner. In Q2, NFLX beat its earnings per share estimates, but Netflix stock plummeted anyways. Why? As InvestorPlace’s own Vince Martin explained, management spends significant money on acquiring subscribers. If the company doesn’t grow subs robustly — and it didn’t — that’s akin to throwing cash out the window.

Investors are right to have apprehensions about NFLX stock, especially with an uncertain Q3 looming. But in the bigger picture, willing bulls have three factors moving in their favor:

Smart, But Aggressive Business Decisions Bolster Netflix Stock

One of the common criticisms that you’ll hear against NFLX stock is the cash burn. Management has invested heavily to get to where it is. But I’ll argue that it’s not doing this haphazardly.

Case in point is the content streamer’s recent announcement that it acquired ABQ Studios in Albuquerque, New Mexico. Currently, Netflix calls Los Angeles home, which is the world’s entertainment capital. But we’re rapidly moving into a content paradigm shift, and the move perfectly fits into the company’s ethos.

First and foremost, the decision saves money. You want to talk about cash burn? California is a cash burn. The taxes, soaring costs of living, and yet more taxes have driven residents out. That’s why so many smart people and companies are leaving, and I hope to join their ranks (no joke!).

Second, from a content standpoint, you can do almost everything in an Albuquerque studio that you can in an overpriced Hollywood studio. You don’t think movie producers flew to the moon to film “First Man,” do you? It’s the same principle regarding this move.

Plus, ABQ Studios is a proven success. On its impressive resume are high-profile films and shows including “Logan,” “Preacher,” “Better Call Saul,” and the original “The Avengers.”

The only difference is that it’s cheaper. That’s a big plus for the Albuquerque economy and Netflix stock.

NFLX Stock Represents a Massive Content Powerhouse

Another common criticism against Netflix stock is that the underlying company goes up against the entertainment industry’s juggernauts. Since NFLX is no Disney, in theory, the organization must make do with scraps. But then again, those scraps are turning heads.

As I mentioned last month, Netflix had a stunning night at the last Emmys award show. Netflix-produced programs took home 23 wins against 112 total nominations. What’s more satisfying is that the content streamer beat out premium-cable king HBO, which had 108 nominations.

To move past this present funk and to justify its rich premium, NFLX stock has two main challenges: can the company produce compelling content, and is that content enough to draw in new subscribers? The first part of the question can be answered with a resounding yes.

The second part? I concede that Netflix stock must provide a convincing answer to shareholders. As my colleague Martin stressed, the Q2 result did the organization no favors.

But let me propose to you that the most difficult component of the two-pronged question has been answered. When I was younger, I dabbled in sales, and I failed miserably. Mostly because I sucked, but it didn’t help that I was trying to sell junk products to smart people.

Now, my wife is an excellent salesperson. English isn’t her first language. Heck, it’s not even her second language. So how did she succeed when I couldn’t sell ice-cold water in the Australian outback?

Primarily, she doesn’t give a hoot what others think about her, which is an awesome life lesson for us all. But she was also selling a compelling product at a great price.

That’s exactly what Netflix is. So don’t worry about short-term results. The subs will come.

The Future Is Digital

Netflix doesn’t have the money that the major studios just yet. But we all know that money doesn’t necessarily buy blockbusters. Even Disney’s last “Star Wars” film (Solo: A Star Wars Story) didn’t do so well for a variety of reasons, but lack of funds wasn’t one of them.

In this brave new world, it’s compelling, relevant content, not wallet size, that matters. Just look at the spectacular rise of eSports. In the perhaps not-too-distant future, eSports will be more popular than real sports.

Why is this happening? Because eSports athletes make genuine connections with their fans that you don’t see in professional sports leagues. In other words, audiences are more invested in the drama. The monetary aspect just doesn’t matter as much.

Given enough time, this “big picture” concept will drive Netflix stock to higher ground. While I’m not denying the challenges, I don’t think it’s worth nitpicking the details in an otherwise attractive story.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/3-reasons-why-netflix-stock-is-a-buy-ahead-of-q3-earnings/.

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