I still remember the first time I saw my neighbor removing a red envelope from his mailbox.
It was 2005, and I was living in Chicago. I noticed that every few days he’d go out to his mailbox and pull out a bright red square envelope.
Back then, I rented my movies from Blockbuster.
It would cost $5 for a three-day rental. You remember the deal — you had to rush back to the store at 8 p.m. on the third day or you’d start racking up late fees!
So when I discovered that this new company mailing red envelopes didn’t charge late fees … and allowed you to pick your movie from your computer instead of driving to a Blockbuster only to discover your title was rented out … it was clear that this company was going to change the way Americans watched films forever.
Investors who bought shares of Netflix (NASDAQ:NFLX) at that time — what I now call “the red envelope moment” — scooped them up for as little $1.30. Today, Netflix trades for … $300!
What We Learned from Earnings
Netflix is now one of the most popular, widely held and researched stocks. I get asked about it all the time. And I expect even more questions after the company’s latest earnings report, which I found very interesting.
Earnings of $1.47 per share easily beat expectations, but revenue was light. The number of new U.S. subscribers missed big time — 35% below estimates — but new international subscribers beat expectations.
What are investors to make of these mixed results?
First, streaming video competition is really heating up in the United States. Amazon (NASDAQ:AMZN), Hulu, and YouTube have been around for a while, but some big new names are jumping into the fray, like Apple’s (NASDAQ:AAPL) Apple+, Disney’s (NYSE:DIS) Disney+, HBO Max, and Peacock from NBCUniversal.
Netflix raised prices at the beginning of the year, but even prior to that increase the new competitors are significantly cheaper … I’m talking half the cost or even less. In a letter to shareholders, the company acknowledged that the higher prices have “led to slower U.S. membership growth.”
Second, Netflix’s biggest success — and opportunity — is clearly the rest of the world. International growth is why the stock moved higher today.
A Better Opportunity
When you think of international growth potential, what’s the one country that comes to mind?
China.
And China isn’t particularly friendly to outside companies and content providers, so Netflix does not operate there.
That’s why the leading content streaming company in China, iQIYI (NASDAQ:IQ), wants to be the “Netflix of China.” And why wouldn’t it? China is already the largest entertainment market in the world … and it’s growing as more citizens come online.
In fact, iQIYI and Netflix have a partnership, with iQIYI licensing some of Netflix’s original content.
That said, there are companies with much bigger potential in the streaming video industry and elsewhere. For example, if iQIYI can become just half of what Netflix has become, it is a seven-bagger from its first day of trading in March of last year. It trades at about half the price-to-sales valuation as Netflix, and the big upside potential comes from more people using the internet in China, more people entering the middle class, and more people streaming videos.So, would I buy Netflix today? It’s a good company. It dominates streaming video and continues to emphasize original content, which should push the stock higher in the coming years.
One thing is for sure, making it fast and easy for people to watch tons of videos is a great business … and great for investors.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
