It’s hard to believe that I haven’t written about Netflix (NASDAQ:NFLX) since mid-January, before the world completely changed. Netflix stock has been a major beneficiary of this change.
Netflix reports third-quarter results on Oct. 20 after the markets close. Owners of Netflix stock ought to be looking at the following three items in no particular order.
Maybe it’s just because I live in Canada, and our content is generally regarded to be slightly lesser in quality than the stuff Americans get on Netflix. Still, the novel coronavirus seems to have hurt the overall viewing subscriber experience, not helped it.
When Emily in Paris is your best stuff, you know the content is hurting. In April, Co-CEO and chief content officer Ted Sarandos assured viewers that it had plenty more left.
“Our 2020 slate of series and films are largely shot,” Sarandos told analysts during the company’s quarterly earnings call April 22, “and are in post-production stages in locations all over the world. And we’re actually pretty deep into our 2021 slate. We don’t anticipate moving the schedule around much, and certainly not in 2020.”
1. Netflix Stock and Content
In its Q2 2020 conference call, Sarandos suggested that the content in 2021 would be even stronger than in 2020. Co-CEO Reed Hastings also discussed the state of its content for 2021 in its second-quarter shareholders’ letter.
“For 2021, based on our current plan, we expect the paused productions will lead to a more second half weighted content slate in terms of our big titles, although we anticipate the total number of originals for the full year will still be higher than 2020,” Hastings stated in July.
That’s good news for both subscribers and shareholders.
What I’ll be looking for is a confirmation that 2021 content is going to be as strong as it’s ever been despite the difficulties of shooting shows and movies during a pandemic.
If it does a reasonable job of explaining where things are, I do not doubt that Netflix will continue to deliver new content.
Subscriber Growth Sustainability
Over the last couple of years, I’ve been fixated on its ability to grow its operating profit per subscriber.
“Over the past seven years, Netflix has grown its operating profit from $1.81 per subscriber to $14.22 per subscriber (based on a Q4 2019 projection of 165.93 million global subscribers) through the end of September, a compound annual growth rate of 34%,” I wrote in January.
So, I’ll be watching to see where it’s at on this front.
It had a 12-month trailing operating income of $3.75 billion and 192.95 million paid subscribers at the end of June. That’s $19.44 per subscriber, up from $15.56 at the end of 2019, a growth rate of 25% in the first six months of fiscal 2020.
I would expect that the operating income per subscriber over the trailing 12 months will be well into the $20s in the third quarter.
Netflix estimates it will have 195.45 million paid subscribers at the end of the third quarter. Should it increase the operating income per subscriber by 25% to $24.30, the trailing 12-month operating income would be $4.7 billion.
I won’t be upset if Netflix doesn’t quite meet the $24.30 figure in operating income per subscriber mentioned above. I’m only concerned that it’s continuing to go in the right direction.
Global Paid Net Additions
Netflix is forecasting that it will add 2.5 million net paid subscribers in the third quarter, a 63% decline from Q3 2019, and a 75% drop from the second quarter. That guidance produced a bit of selloff during the summer. It’s since gained all of that back.
Considering it’s already added 26 million subscribers in 2020, an additional 2.5 million subscribers isn’t the bad result some think it to be. At some point, people’s Netflix watching has got to slow down.
That said, app analytics company Apptopia believes Netflix could hit 5.4 million net paid subscribers in the quarter. If that happens, my operating income per subscriber mentioned above goes up even more.
The Bottom Line on Netflix Stock
In January, I stated that I thought Netflix was cheaper than it’s even been, excepting for the August 2019 decline into the $250s. Year to date, it’s up 67% through Oct. 15.
Is it done? I don’t think so.
In fact, good results from Q3 2020 and Q4 2020 could lead to its first fiscal year of positive free cash flow generation since 2011. It’s a big deal.
If you’re holding for 2-3 years, $540 shouldn’t be a bad entry point.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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