Netflix (NASDAQ:NFLX) reported encouraging earnings last night. As a result, Netflix shares are 8% higher this morning in pre-market trading.
The stock has had a miserable time this year as the underlying business has failed to impress. But I think that this could be a great opportunity for me to invest in the shares.
Earnings
Revenues at Netflix came in lower than expected. Rather than the anticipated $8.04bn, the company reported $7.97bn in net sales for the months April, May, andJune.
But higher membership prices helped earnings per share come in higher than expected, despite the disappointing revenues. Netflix earned $3.20 per share, rather than the forecast $2.94.
But the share prices action is most likely in response to the report on the company’s subscriber numbers. This was much better than predicted.
The number of Netflix subscribers fell by 1m during the last three months. But this is significantly better than the number management had warned investors about losing.
Subscribers
Subscriptions are Netflix’s most important source of revenue. As such, the rate at which the number is going gives investors a good idea of the state of the underlying business.
At its previous earnings report, Netflix announced very disappointing subscriber numbers. The company reported a loss of 200,000 subscribers, compared to an anticipated gain of around 2.5m.
Worse yet, management had originally said that it expected to lose another 2.5m subscribers between April and June. As a consequence, Netflix shares fell around 35%.
As mentioned, it only lost 1m subscribers after all that. And management forecast a return to subscriber growth in the coming months.
There’s plenty more for Netflix shareholders to feel optimistic about. Most notably, the introduction in 2023 of a lower-cost subscription tier funded by advertising revenues.
For the time being, it looks as though the worst news might be over for the company. If so, with the stock down around 60% since the start of the year, where do I go from here?
Should I buy Netflix shares?
For me, this marks a potential turning point for Netflix as a company. I’ve avoided the stock before, but I now think that this might be an investment opportunity for me.
I’ve stayed away from Netflix shares before because of the amount of cash the company needs. Building a content library is expensive and I’ve thought that this will get in the way of shareholder returns.
Advertising revenue, however, might offset this. If Netflix can generate enough cash from advertisers to pay for the expansion of its content library, then I think this might be a really good investment for me.
There are clear headwinds for it as a business. The possibility of a recession impacting subscriber numbers as consumers become more conscious about where they spend their money is an obvious one.
In my view, however, Netflix is setting itself up to do well over time. A recession might slow the company’s progress, but I think that the business will do well.
While the stock is likely to be more expensive today than it was yesterday, I think that the share price is reflecting some unwarranted pessimism. As such, I’m looking at buying some shares for my portfolio.