For investors of Netflix (NASDAQ:NFLX) stock, the only word that could adequately describe the month of July is “nasty.” Okay, I suppose “ugly” and “painful” would also fit the bill, but you get the picture: the price action was cringe-worthy, causing a number of shareholders to bail on the streaming standout.
The precipitous drop from $380 to about $310 was admittedly gut-wrenching, but I don’t believe it’s a reason to bail on a company with strong brand-name recognition and loyal subscriber base (even if the numbers haven’t impressed all stakeholders).
I’d like to share with you my reasons for holding onto your Netflix stock — and perhaps even buying a few shares if you’ve got the stomach for it.
Why NFLX Stock Slid in July
From the beginning of the year until mid-July, the NFLX stock price held steady, trading in a fairly tight range and leaving shareholders wishing for a move — and boy, did they get one. Netflix’s second-quarter earnings report, which was announced on the 17th of July, induced a share-price drop of 10% in a single day. Investors haven’t seen anything resembling a recovery so far.
What happened exactly? Let’s take a look at the numbers: Netflix actually beat expectations in terms of earnings, with 60 cents EPS for the quarter compared to analyst expectations of 56 cents. The company’s revenues for the quarter were in line with expectations: the analyst consensus projection was $4.93 billion and the actual number was $4.92 billion, representing a year-over-year increase of 26% — not too bad at all, it would seem.
Then came the subscription figures — and the shock and horror. Concerning the number of domestic paid subscribers added for the quarter, analysts projected that Netflix would see an increase of 352,000; the actual number revealed a loss of 126,000 subscribers. Meanwhile, the number of subscribers added internationally for the quarter came in at just 2.83 million, whereas analysts were expecting 4.81 million.
Netflix Stock: Let the Panic Commence
The subscriber count wasn’t exactly up to scratch — I’ll give the NFLX bears that much. It didn’t help that Netflix also announced they will be losing two very popular programs, “Friends” and “The Office.” This unfortunate announcement came on the heels of AT&T (NYSE:T) revealing that HBO Max, their much-touted streaming service, will acquire exclusive rights to stream “Friends” in 2020.
Maybe it’s because I don’t happen to watch those two programs, but I don’t necessarily view Netflix’s loss of “Friends” and “The Office” as a bad thing. If anything, losing those two shows should free up some cash so Netflix can spend on other things like original programming. This was the gist of Netflix’s official statement in response to the backlash:
Much of our domestic, and eventually global, Disney (NYSE:DIS) catalog, as well as “Friends,” “The Office,” and some other licensed content will wind down over the coming years, freeing up budget for more original content.
Seeing Past the Pessimism
I tend to concur with the official statement, and any sentimental attachment to the two aforementioned shows isn’t going to alter my outlook on the Netflix stock price. I’m glad that the company is moving forward and looking towards the future instead of opting to recycle old material and play it safe; after all, Netflix was revolutionary from the outset, and I’ve always appreciated their bold approach to programming.
Benjamin Swinburne, an analyst at Morgan Stanley, seems to agree with me on Netflix’s strong potential going forward. He reiterated his overweight rating on NFLX stock recently, calling Netflix and Disney his “top long-term plays” in the streaming space.
Like Swinburne, I don’t see any reason why investors couldn’t own shares of both companies as they battle for subscribers and market share: people are always hungry for entertainment and there’s more than enough room for both companies (along with AT&T) to prosper.
The Takeaway on Netflix Stock
I won’t deny that Netflix’s Q2 earnings announcement had its share of negative surprises, but not all of the numbers were bad and the loss of recycled programming could turn out to be a smart move on the company’s part. In defiance of most social-media gurus, then, I’ll persist in my bullish stance on Netflix stock, an always strong contender in the ever-heated streaming wars.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
