Investors in Netflix (NASDAQ:NFLX) stock chose to buy the rumor of big earnings, then sold the news.
Shares hit $639 each in Oct. 19 trading, then fell to $625 after the company announced earnings of $1.45 billion, $3.19 per share, and revenue of $7.48 billion for the third quarter of 2021.
Revenue was up 16% year-over-year, operating margins rose to 23.5% and (more important) the service added 4.4 million subscribers during the quarter. That’s double what it added last year.
The stock sold off because it’s expensive. Investors were paying 66 times earnings, and 10 times revenue. Shares were up 18% year to date, in-line with market averages.
But there were two strengths hidden inside the earnings announcement, which rival Walt Disney (NYSE:DIS) can’t match.
NFLX Stock and the Hit Show
The first was Squid Game.
About 142 million member households have watched the show, two-thirds of Netflix global audience. Squid Game wasn’t produced in the U.S. It was made in Korea.
Squid Game shows that Netflix is bringing the advantages of its global footprint back home. Analysts have seen Netflix’ global reach only in terms of audience and revenue growth. The show demonstrates that global reach also brings in American audiences.
This is something Netflix shares with Amazon (NASDAQ:AMZN) Prime, which has long put shows made in India, Chile, Spain and even Russia before American audiences. Squid Game, however, is the first show to move financial results for a whole streaming company.
Netflix’ Virtual Staging
It is pushing the envelope globally on virtual staging. These are productions shot without sets, that can be edited inside a camera because they contain all production elements. The German series 1899 is being made this way.
Virtual production changes the business like nothing has since sound. Whole studios, and locations, can be replaced by a virtual studio. Over time, costs come down and margins should rise. Games can be produced on the same stages as films. Netflix is now buying game companies as fast as it once sought producers.
Will Netflix Censor Itself?
The risk is that a global platform means global pressures on content.
A walk-out by some American employees over the content of a Dave Chappelle comedy special may be contained by an apology. When governments get involved, as in India, pressure to self-censor can become intense.
In his third-quarter conference call, CEO Reed Hastings talked confidently of “entertaining the world.” But the world has many different ideas as to what constitutes entertainment, and what constitutes blasphemy.
This may be one place where Disney has an advantage. Questions of taste are haggled over endlessly at a traditional studio, long before a show or movie is made. Netflix has attracted creators by selling them on a lighter touch.
The Bottom Line on NFLX Stock
Netflix has given investors an incredible run. Shares have gained an average 80% each of the last five years. That’s even better than Amazon. Netflix’ market cap now rivals Disney’s, and for a while last year exceeded it.
The high price of Netflix stock has kept me out of it. Pullbacks offering a buying opportunity are few and far between. They’re also accompanied by general market weakness. Since Aug. 9 the stock has been on fire, up 22% in less than three months.
If I were to choose between Netflix and Disney today, I’d choose Netflix. It offers a better technology story, more potential in gaming, and it has the global reach. That doesn’t just mean money coming in, but ideas.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.