Digging into the results

The Q3 results were ahead of expectations across key metrics including revenue, operating income and membership numbers. The main one that impressed me was the 4.5% year-on-year growth in paid subscribers.

Why is this important? Much of the 56% fall in the share price over the last year came from the poor Q3 2021 results where subscriber numbers dropped to 213m from 220m the previous quarter. Concerns around whether people were cutting back on Netflix, or simply switching to competitors, caused the share price to fall sharply.

Therefore, the fact that we’re seeing the numbers increase again is a good sign that the company is back on track.

Another part of the results that I think was a smart move was the announcement regarding a cheaper ad-supported plan. Not only should this attract new users with the lower price point, but it should also increase revenue via the companies that pay to advertise.

A lot of potential upside for Netflix shares

Even with the 21% rally last week, the growth stock is still a long way away from the highs of the past year. It closed Friday at $291, with the year high at $700.

From that angle, it’s clear that there’s plenty of room to run higher in the coming year. I think what will be critical in achieving this is how the next quarter goes. If the business can beat expectations again, it’ll prove that this wasn’t just a flash-in-the-pan period.

There was a lot of concern around the falling membership numbers before the Q3 results and so investors are understandably wary about the future. Another solid quarter of earnings should mean this concern is quashed, with investors then starting to pile in.

One issue I do have relates to the impact of foreign exchange movements. The US dollar has strengthened significantly this year (circa 20%), with the euro and British pound weakening. Netflix has to repatriate earnings from these regions back to dollars. But as the home currency is strong while the others are weak, it has a negative impact. In fact, the results had an entire page detailing this, concluding that it will negatively impact revenue by $1bn!

The business clearly needs to better manage the treasury operations to mitigate or hedge some of this risk.

Although I do like the Netflix business model, I think it’s a little too soon for me to get excited and buy the stock. Rather, I’m going to wait until the next trading update to see if the membership base is still showing signs of growth.

Strong earnings

It beat expectations on both revenue and profits last night. Reported revenue was $7.93bn (against a $7.837bn forecast) and earnings per share were $3.10 (against a $2.13 forecast).

Most importantly though, the company managed to add 2.41m new subscribers over the last three months. Management had been forecasting a 1m subscriber increase.

That’s why the stock is surging in extended trading. Last night’s results marked a sharp change of fortune for the business.

Since the start of the year, the number of Netflix subscribers had declined by around 1.2m. As a result, the stock had fallen by around 60%.

Management also announced that it expects subscriber growth to continue. In its earnings release, it indicated that it’s aiming to add 4.5m new subscribers before the end of the year. 

In addition, Netflix’s new ad-supported service launches in November. Starting next year, the company will also begin making moves to crack down on account sharing.

To my mind, this is clearly an encouraging report for shareholders. But with the share price still nowhere near where it was at the start of the year, should I buy Netflix stock?

Time to buy?

I don’t own Netflix shares. And despite a positive quarter, I don’t anticipate buying the stock any time soon. 

In my view, Netflix doesn’t generate enough cash to justify an investment at today’s prices. Yesterday’s report did nothing to change my mind on this. 

Despite reporting $1.4bn in net income, free cash flow came in at just $500m. For a company with a valuation of $107bn, I don’t think that’s high enough.

The reason cash flow is so low is that Netflix has to spend heavily on its content. According to its financial statements, the company spent $4.5bn on content assets during the last three months.

Furthermore, this shows no signs of slowing down. The company’s spend in Q3 last year was around $4.6bn. 

Since the start of the year, it has generated $4.4bn in net income, but just $1.2bn in free cash flow. It has spent almost $13bn on content.

In order to invest in the shares, I’d need to see how the company is going to produce enough cash to justify my initial outlay. The company’s content expenses mean I don’t see that right now.

Investing in Netflix

There are a couple of ways that Netflix shares could become an investable proposition for me. One is by generating significantly more revenue and profit.

If the company can generate enough income to offset its high content expenses, then I’d be willing to buy the stock. But that seems to be some way off at the moment.

The other is by bringing down its content spend and converting more of its net income into free cash. This also seems to be some way off at the moment, which is why I’m not buying the shares yet.

Given that they’re rising again, I’m wondering whether it’s a good time to buy Netflix shares for my portfolio. Let’s take a look.

Should I buy Netflix shares today?

Let’s start by looking at the valuation here. Is there value on offer right now?

At present, Wall Street analysts expect Netflix to generate earnings per share (EPS) of $10.10 for 2022 and $10.80 for 2023. This means that at the current share price of $240, the stock is trading on a forward-looking price-to-earnings (P/E) ratio of 24, falling to 22 using next year’s EPS forecast.

In the past, these ratios would have been considered an absolute steal for Netflix. Not so long ago, this stock had a triple-digit P/E ratio. However, times have changed and the company’s growth has slowed. This year, revenue growth of just 7% is projected. Meanwhile, net profit is expected to decline 11% to $4,536m. Looking at these projections, I wouldn’t say the stock is a bargain at the moment.

Growth plan

Now, Netflix does have a plan to accelerate growth.

Shortly, it’s about to launch an ad-supported tier in an effort to appeal to consumers who don’t want to pay a monthly subscription fee. This is a smart move. Netflix expects this tier to capture about 40m viewers worldwide by Q3 2023, according to the Wall Street Journal.

Wall Street certainly seems to like this plan. Recently, analysts at Oppenheimer upgraded the stock to ‘outperform’ from ‘perform’, stating that the new ad tier should accelerate subscriber growth, drive average revenue per user, and slow churn. They have a price target of $325 here, which implies share price upside of about 35% right now. Meanwhile, analysts at Evercore ISI believe the new plan is not factored into the share price. Their price target is $300, which implies upside of around 25%.

My view is that a lot will come down to execution. If Netflix can execute on this plan and gain a bunch of new subscribers, there’s a good chance its share price will rise. However, there’s no guarantee the plan will work. Consumers have a lot of options these days when it comes to streaming. Right now, Netflix faces competition from the likes of Disney, Amazon Prime, Apple TV, Hayu, YouTube, and more.

Netflix stock: my move now

Putting this all together, I’m happy to leave Netflix shares on my watchlist for now.

If Netflix can execute on its growth plan, today’s share price may turn out to be a bargain. However, I’d like to see some evidence that the plan is working before I buy shares.

Until I see this, I think there are better shares to buy for my portfolio.

Netflix

Shares in streaming giant Netflix (NASDAQ: NFLX) have lost more than half their value over the past year. One of the key reasons is that investors are nervous about previously-fast-growing subscriber numbers starting to fall.

I think the worries are overdone. Netflix has an excellent business model, in my view. It can spread the high costs of producing quality content across millions of customers. As the costs are basically fixed but subscriber numbers are variable, the company can tweak pricing to minimise customer turnover. On top of that, the costs are a one-off. Like other broadcasters, Netflix might still be earning money from content it makes this year, two or three decades from now.

The high costs of making new, compelling content are a risk to future profitability. If Netflix does not keep doing this on a regular basis, it could lose subscribers. But I think its strong market position and potentially lucrative business model make it an attractive share for my portfolio.

eBay

Another name among beaten-down growth shares I have been eyeing for my portfolio is online marketplace eBay (NASDAQ: EBAY). The shares have fallen 25% over the past year.

eBay has not consistently grown in recent years. Yet I continue to group it alongside other growth shares however, and last year revenues rose 17%. With its scalable platform and large installed customer base, I expect the business to keep expanding for a long time.

It also has strong pricing power. For many of the items sold on eBay, there simply is no competitor with the same number of possible buyers. So even if eBay pushes up prices, sellers have limited options to go elsewhere if they still want to reach the same size of audience.

Over time, although I expect revenue growth to be modest, I do reckon the company can keep growing. I also think its pricing power could help the business boost profit margins in future. For those reasons I would be happy to buy eBay for my portfolio.

Will these shares recover?

Both Netflix and eBay have fallen a lot in the past year. This suggests investor sentiment has turned negative. Could that continue, pushing the share prices even further down?

I think it could. But as a believer in long-term investing, what attracts me to these shares is not where their share price may go in coming months, but rather the potential level five or 10 years from now. I think both have attractive business models that give them a strong competitive advantage and pricing power. That can be the basis of growth in both revenues and profits.

Netflix

The investor jury has been out on Netflix (NASDAQ: NFLX). The streaming service has spent heavily on expensive content, meaning it has a high cost base. But there are signs that consumers tightening their belts is leading to some cancelling their subscriptions. Could a recession badly hurt revenues and profitability?

I see a risk that it could. But things may go the other way too. As people cut back spending on nights out and restaurant dinners, the allure of home entertainment might actually grow.

I also think a recession could help Netflix sharpen its business model. One challenge it faces is how to price its service for markets where incomes are lower than in developed countries. Cracking that problem could open up huge new opportunities for the firm. A recession in existing markets will help the company understand the limits of its pricing power in minute detail. I reckon it could use that data to figure out the optimal pricing models to help boost sales globally.

I see Netflix as among the growth shares that could do well in a recession. I would consider adding more to my portfolio.

Begbies Traynor

A different logic applies to Begbies Traynor (LSE: BEG).

The restructuring specialist is already in growth mode. Revenues have more than doubled in the past four years. Unfortunately a recession would likely cause a lot of businesses to struggle. That could provide more opportunities for Begbies Traynor.

The company has been raising its dividend annually and yields 2.5%.

One risk here is profitability. Last year the company made a loss. In general, its profit margins are slim.

Yet I think this growth stock could do well in a recession as business would likely expand. But the profit margin is not consistently attractive enough for me to add the shares to my portfolio at the moment.

B&M

The growth story at discount retailer B&M (LSE: BME) has been very strong for the past few years. But has it now fizzled out? After all, both revenue and profits dipped slightly last year.

I see that as a pause for breath after the retail chain had grown so strongly over the previous few years. Discounters tend to do well when the economy does badly. Shoppers watching their pennies can mean they attract new customers. And existing shoppers may choose to spend a higher percentage of their weekly budget in stores like B&M than costlier rivals.

A change in management is a risk to profits though, if the new chief executive cannot keep a tight lid on costs. That has been a key part of the chain’s recipe for success so far. But B&M is now well-established and benefits from a strong customer following. I think its price focus could help it grow as a business in coming years.

This growth shares is down 28% in the past year. I see that as a buying opportunity for my portfolio.

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.

The question I’ve been pondering is whether some of Netflix’s biggest rivals could be next to fall. Consequently, I was interested to read the thoughts of Peter Garnry – Head of Equity Strategy at Saxo Markets.

Can Netflix stock recover?

Commenting on Netflix, Garnry reflected that it needed to produce “bigger and better content” away from the flagship shows as soon as possible. Without it, rivals have a chance to vacuum up previously loyal subscribers.

Of course, Netflix isn’t going to take a drop in popularity lying down. One option, touched on by Garnry (and already mentioned by the company itself), would be to introduce adverts to the platform.

I can see how this might work. For a lower monthly fee, viewers would be asked to watch a number of ads before being allowed access to their programme of choice. This might succeed in helping subscriptions to rebound.

Another potentially lucrative route is to go down is to add game streaming to its armoury. After all, the video games market is bigger than both film and music combined. Done right, this could potentially help Netflix stock recover from what’s been a truly awful last 10 months, or so.

However, it’s Garnry’s last comment that really caught my eye: “In years to come, this stale feeling towards Netflix is likely to hit other streaming services as budgets and projections are tightened by demand. So it may not be too long until the likes of Amazon, Apple TV and Disney+ find themselves following suit and exploring new realms to entertain their audiences.“

So should I be avoiding the rivals too?

Sell the streamers?

It’s a tricky one. I can certainly see reasons for agreeing with this view. Having become one of the main ways to pass time over the multiple pandemic-related lockdowns, many consumers are likely to feel ‘streamed-out’. On a purely anecdotal basis, the sheer amount of content now available makes it harder for me to commit to a specific programme. As a result, nothing is watched — a consequence known as the paradox of choice.

Then again, one major argument for buying/holding Netflix’s rivals is that they already have other ways of making money. Apple has multiple ‘must have’ devices. Disney has its theme parks. Amazon has its web services and retail divisions.

This doesn’t mean their share prices won’t fall further from here, of course. Concerns over the global economy could prevent growth stocks from rediscovering their mojo for a while.

Opportunity knocks

I’ll hold my hands up. I was initially bullish on Netflix’s ability to bounce back to form. However, developments since then have tainted the investment case for me, at least for now.

While revenue is expected to grow 9% in 2022, I’d need to see evidence that the company is grasping the nettle and doing what is necessary to steady subscription numbers.

Due to their already-established multiple earnings streams, I’d be more likely to buy Amazon, Apple or Disney today. The shares are down 32%, 19% and 38% respectively this year!

Although neither of those shares trade for pennies today, I would still consider buying them both for my portfolio now. I also think their stories can help me in my own hunt for potentially lucrative penny stocks to buy for my portfolio.

Pennies shares that soared

The two names in question are famous ones now – Apple (NASDAQ: AAPL) and Netflix (NASDAQ: NFLX).

But what is striking is that one of them was already a famous name even when it was trading for pennies. Apple went public in 1980, seeing its share price on the first day of trading soar from $22 to $29. But by 2002 the Apple share price had crashed as low as 4c. Between its low and high prices, Apple shares soared an incredible 154,900%!

Compared to that, the gain between high and low at Netflix looks more modest, coming in at 54,840%. But that is still an incredible growth feat few shares would ever match. To put it into perspective, it means that if I had put £1,000 into Netflix when its share price touched an all-time low, I could have made more than half a million pounds in profit by selling my investment at the high share price.

Why I’d buy both today

Clearly I have long since missed the opportunity to invest in these two tech titans for pennies. But I would still consider buying their shares for my portfolio today despite the much higher share prices than some years ago. Indeed, I have already bought Netflix shares this year.

I think some of the things that have helped propel the companies to success in the past remain relevant today. They have built strong brands that give them pricing power. Both have large installed customer bases. Both compete in an area where I think demand is likely to grow in coming years, as consumers spend more and more time on their digital devices.

There are risks. For example, declining subscriber numbers at Netflix could lead to lower revenues and profits. As consumers tighten their belts as the economy worsens, both companies could suffer from customers cancelling service subscriptions to cut household costs. But in the long term, I think the quality of the businesses will help them perform well. They have strong brands and unique service offerings, giving them competitive advantages.

My lesson on hunting for penny stocks to buy

Why did those two penny stocks perform incredibly well when many do not?

I think one reason is that, from the outset, both had a unique competitive advantage. That meant that, as they grew their customer bases, they could grow profits without always adding on costs at the same rate. That is the beauty of a scalable business model. It is something I will continue to look for when buying shares for my portfolio, including penny stocks.

Here are three growth shares I would consider buying for it now.

Alphabet

Over the past year, the share price of Google parent Alphabet (NASDAQ: GOOG) has grown just 1%. Meanwhile, the business continues to perform strongly and now trades on a price-to-earnings (P/E) ratio of 21.

That may not sound cheap, but I think the growth story at Alphabet remains compelling. Over the past five years, revenues at the firm grew at a compound annual growth rate of 23%. Earnings growth was even stronger in the same period, coming in at an annual compound rate of 31%.

My Stocks and Shares ISA move

That would be good for any company, I feel, but what makes its more impressive is that Alphabet was starting from a large baseline. The company recorded over $258bn in revenues last year (it reports in dollars, of course, but in GBP it is £200bn, at current exchange rates). Double-digit percentage growth for a company with huge revenues is a major feat.

I think the growth at Alphabet reflects its massive user base and the way the company is integrated into their daily lives. I expect that to keep powering growth. A slowdown in ad spending could hurt profits, but I see the current Alphabet share price as an attractive buying opportunity for my Stocks and Shares ISA.

Netflix

The streaming giant Netflix (NASDAQ: NFLX) has a lower P/E ratio than Alphabet, at 17. Its shares have crashed 60% in the past year.

That reflects concerns about the ability of the company to retain customers and add new ones at the sorts of prices it needs to cover its costly productions. I do see customer churn as a risk to both revenues and profits. But I think the sell-off in these growth shares has been overdone, which is why I added the company to my Stocks and Shares ISA. Like Alphabet, Netflix benefits from a large installed customer base. It has expertise in monetising its content, so I think it can figure out the right pricing to stop too many customers cancelling their subscriptions.

Its content library gives it a unique competitive advantage. Over time, the company can spend less money developing new shows and rely more on a growing archive. That could be good for profits.

S4 Capital

The S4 Capital (LSE: SFOR) share price has taken a battering this year too, falling 49%.

That reflects concerns about its delayed results. But the company has now published audited results and promised to improve its financial controls. Meanwhile, the digital media agency group posted massive growth last year. On a like-for-like basis, billings grew 67%, revenue was up 52% and adjusted basic earnings per share increased 65%.

One ongoing concern I have is costs. S4 fell to a pre-tax loss last year, while margins shrank. If that continues, it could hurt profits. But I think the growth story here remains compelling. Now that the audited results have been published, I am considering taking advantage of ongoing share price weakness to buy more S4 Capital for my Stocks and Shares ISA.

I don’t invest all that frequently in the Nasdaq. One reason is, like other investors, I’m moving away from growth stocks at present. Another more practical reason is that I’m charged an exchange rate fee for purchasing dollar-denominated shares. Despite this, here are three Nasdaq-listed stocks I’m looking at for my portfolio.

Netflix

Netflix shares have fallen massively this year. First the tech sell-off, then a disappointing trading update in which it highlighted falling subscriber numbers, and now investors are suing it for allegedly misleading the market. But Netflix remains a very profitable business. It’s price-to-earnings ratio was around 17 for the last four quarters. That’s not bad for a tech stock.

Operating income was $6.2bn in 2021 and I see this growing if the firm can sustain subscriber numbers while reducing content spending. This jumped massively between 2020 and 2021. Economising on such spending could improve margins. If I were to invest, I’d be a little concerned about competition eating into Netflix’s market share. As a consumer, I actually prefer Amazon‘s offering and BritBox.

Novavax

I was fortunate to invest in Novavax (NASDAQ: NVAX) as it rose during the pandemic. In the end, I lost faith in the company and its Covid-19 vaccine — its first commercialised product. But now I’m considering it again. It’s trading below its 2021 highs, and I still think there’s appetite for an effective non-mRNA vaccine in the battle against Covid-19. Novavax projects $4bn to $5bn in revenue for 2022. According to analysts, vaccine sales should account for $3.5bn in revenue.

The company is waiting for US regulatory approval, where green-lit shots include those made by Pfizer, Moderna and Johnson & Johnson. The vaccine has been approved around the world, including in the UK and EU, although that’s no guarantee it’ll be given access to the potentially lucrative US and that remains a risk.

Oriental Culture Holding

Oriental Culture (NASDAQ: OCG) is by far the smallest company on this list. The firm, based in China, provides a platform for the online trade of artworks and collectibles. In its recently released full-year results, OCG announced that operating revenues increased 115.6% to $37.6m in 2021. Gross profit rose 137.7% to $35.2m, up from $14.8m in 2020.

The growth of the Chinese art market is one reason I’m looking to add this stock to my portfolio. Revenue from fine art sales in China grew 43% to $5.9bn in 2021, with 63,400 pieces sold, according to Artron, a Chinese art sector group. This figure puts China ahead of the US by revenue generated from fine art sales. However, it’s worth noting that there could be some short term pain for the Chinese art market in 2022 with the current Covid-19 lockdowns.