The whole entertainment industry has formed a posse to take down Netflix (NASDAQ:NFLX). Don’t panic. The posse’s still in town, saddling the horses, getting another drink of liquid courage at the bar. But it would be a good time to check Netflix’s ammunition and ask what you’re still doing in the stock.
The third-quarter earnings report sent shares up 8%, then down 11%. The launch of streaming services by Disney (NYSE:DIS), AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and others represents a turning point in the history of streaming.
Net income of $665 million, or $1.47 per share, on revenue of $5.2 billion looked great on the surface. But Netflix missed estimates on subscriber growth. Those who bought the stock for growth saw the company maturing. They realized you don’t have a profit until you sell a stock and have the money in your pocket. Then they sold.
The New Rationale
There’s a new rationale coming for owning Netflix: earnings.
While Netflix shares currently have a trailing price-to-earnings multiple of nearly 90, the third quarter shows the company has enormous earnings potential. Netflix only guided to 50 cents per share of earnings for the fourth quarter. But the third quarter means that the NFLX stock P/E should be 50 next year. It’s going even lower.
Netflix re-armed itself this week with $2 billion of new debt, aimed at funding new shows. It’s the third capital raise this year and should bring long-term debt to nearly $15 billion.
That’s a lot of debt, but it’s less than half Disney’s $36 billion, and a tiny fraction of what Comcast and AT&T hold. It would be better to compare Netflix’ debt with that of broadcaster CBS (NYSE:CBS), which also has streaming operations.
CBS had $9.2 billion of debt in June, assets of $23.8 billion and revenue of $15.2 billion. Netflix has had $19.2 billion of revenue over the last year, and assets of about $31 billion at the end of September.
Netflix’s debt, in other words, is not out of line.
The Netflix Secret Sauce
Then there’s Netflix’s secret sauce.
The posse can talk all day about their vast libraries of must-see content, but Netflix knows what you want to watch. It knows what shows you start watching and which ones you stop watching. This data is highly granular, because it also knows its audience’s demographics.
Netflix is coy about the numbers it gives out. It may say Stranger Things had 64 million viewers or Bird Box had 80 million viewers. But ratings, as such, don’t matter. What matters is engagement, the number of paid customers. That number was 158 million at the end of September.
The competition is still in the U.S. corral, where Netflix already has about 60 million subscribers, half the broadband market. It has also pushed through price hikes that have most households paying $13 per month, increasing its average revenue per user by 16.5% over the last year. Disney is charging half that for Disney+ initially, but Netflix still added 500,000 U.S. subscribers during the quarter.
The Bottom Line on NFLX Stock
It’s too late for Netflix’s competitors to overtake it.
The company’s growth is going to slow, and potential investors need to focus less on growth than on earnings. But Netflix is way ahead of its competitors in terms of programming, technology and knowledge of who’s watching.
Earnings will come and they will justify your purchase of Netflix stock. Let people panic for a while and when everyone screams “sell,” buy some.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.