Don’t Sell Netflix Stock on the News

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Purely from a trading standpoint, it’s not terribly surprising that Netflix (NASDAQ:NFLX) dipped on Wednesday. Netflix released first quarter results on Tuesday after the close, and NFLX stock had roared into the report, gaining over 40% from March lows.

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Amid a worldwide shutdown caused by the novel coronavirus, investors expected boffo subscriber numbers. Though Netflix delivered, the parabolic rally into the release set up a classic “sell the news” event.

From a long-term perspective, however, Wednesday’s decline is just a blip. Streaming video is a massive market that’s going to grow for years to come. Simply put, it’s a mega-trend.

Netflix’s demand is going to be resistant to any short-term recession worries. And the subscribers added during this crisis are unlikely to leave once normalcy returns and the economy picks back up.

Though investors sold off NFLX following the Q1 release, the quarter in fact confirmed the long-term bull case.

Earnings Are Solid

On its face, the Q1 report looks modestly disappointing. What is close to a worldwide shutdown seemingly would be a positive for Netflix. Yet the company actually missed Wall Street estimates for earnings, and narrowly topped revenue projections for the quarter.

But, as always, investors need to look closer. The first quarter shareholder letter gives important context to the broader numbers. The company’s response to the pandemic hurt profits in the quarter. Netflix incurred $218 million in short-term costs, which hit operating margins by 3.8 points.

Excluding those costs, operating margins would have come in at a whopping 20.4%. Meanwhile, the stronger dollar had a significant hit on revenue, and many newly acquired subscribers only were paid users for a brief portion of Q1, if at all.

This is a strong report from Netflix. And I’d focus on a key metric: the company closed the quarter with over 182 million paid subscribers. Disney+, the new streaming service from Disney (NYSE:DIS), just cleared the 50 million mark.

It’s difficult to see this report as doing anything but confirming Netflix’s lead in streaming.

The Netflix Business

Of course, stocks are about more than just the numbers. And the company’s nimble response to the current crisis shows that investors who own Netflix stock are owning a quality business as well.

After all, Netflix faces an unprecedented situation. It’s dealing with tremendous load on its servers. Usage was so high that the European Union asked the company to moderate its network traffic. Netflix did so quickly and with little apparent impact on the user experience.

Post-production and animation efforts continue as many employees work from home. There’s going to be some impact on Netflix’s slate, as discussed on the first quarter conference call, but Netflix still should have significant content arriving over the next few quarters. That will only add to the company’s competitive edge.

The novel coronavirus pandemic is disrupting businesses worldwide. Not every business can handle the added pressure. Netflix seems to be doing so masterfully — and that, too, matters for NFLX stock.

Users, Numbers, and NFLX Stock

Netflix management did admit on the earnings call that subscriber growth may actually slow in the back half of the year. As chief executive officer Reed Hastings put it, subscriber growth was “essentially a pull-forward of the rest of the year.” Subscribers that otherwise might have joined in September instead signed on in March.

But that’s hardly a problem for Netflix. If anything, amid the streaming wars, it’s a huge advantage. AT&T (NYSE:T) unit WarnerMedia and Comcast (NASDAQ:CMCSA) are launching their own services soon. In the meantime, Netflix’s lead gets only larger.

And at this point, it’s fair to wonder how Netflix can lose subscribers. Even in a short-term recession, Netflix’s “bang for the buck” is significant enough that customers aren’t going to cancel. If anything, the spike in unemployment will accelerate “cord-cutting” and create an even larger base of potential users.

This is going to be a defensive business going forward. Its profit margins are impressive: Netflix still expects full-year operating margins to clear 16%. Some skeptics have worried about cash burn as the company builds out its content, but cash flow was positive in the quarter and Netflix reiterated its guidance that 2020 would be “peak burn,” so to speak.

Again, investors should look past the numbers as well. This crisis is only going to accelerate the transition to streaming video. And though a case can be made for Roku (NASDAQ:ROKU) or other names, NFLX stock seems like the best play on that transition. It’s a fast-growing, profitable, well-managed industry leader. Investors can’t ask for much more than that.

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.


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