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In Focus: Netflix

Thanks for checking out In Focus, our weekly dive into a company, companies, or markets that made Wall Street's news cycle. This week we bring Netflix in Focus.

There were a lot of things to shake the markets up last week. China reported its lowest GDP number since 1992. The EU put Amazon in it's crosshairs over antitrust practices. The White House said there could be more tariffs on China, after telling us a week before negotiations were proceeding. There was also Facebook explaining to regulators what their Libra coin is about. Any one of these headlines could have moved the markets significantly for the week, but none of them did.

Headlines of the past week

What Moved The Markets

Netflix reported earnings on Wednesday evening and reported a big miss, and that news influenced the markets for several days.

Netflix reported revenue of $4.92 billion which was in line with analyst estimates. Earnings per share came in at $0.60, $0.04 better than expected.

The number that hurt Netflix was subscriber growth. Netflix and Wall Street were expecting 5 million new subscribers in Q2 2019, the company reported it grew subscribers by 2.7 million, which was way off of estimates. Also, Netflix lost around 130,000 subscribers.

Blip or Trend

The Netflix earnings call at this particular time is scary for Netflix bulls. Two, three, or four years ago this earnings call wouldn't have meant much. There would have been a slight sell off, but smart investors would've swooped in and bought the stock up at whatever they considered to be a bargain price, driving the stock price back up. So what's the difference between several years ago and now? Competition.

Netflix has been able to operate unchecked ever since they pushed Blockbuster out of the paint. Now however, everyone is entering the streaming business. The question blip or trend is the question that investors are attempting to find an answer to. Will Netflix continue to lose subscribers to others streaming services as they become available, or will Netflix plough ahead using its original content to keep current subscribers locked in and new subscribers signing up?

It's Not All Bad

The way investors sold Netflix's stock would lead you to believe that the entire quarter was bad. There were some bright spots during the quarter. Revenue grew by 26%, operating margin was up 250 basis points, and it ended the quarter with 151.5 million paid subscribers, which represents Y/Y growth of 21.9%.

Chart by Yahoo Finance

The Technicals

The stock price of Netflix is at an interesting level. At this level the stock price found resistance back in March of 2018, and then found support shortly in August of 2018. Below this level there is a level of support around the $270 price level, and below that the $240 price level. The red line, has been an area of resistance in September 2018, April 2019, and July 2019.

The question is where do the bulls, assuming there are some left, place their buy orders? At the $315 level, the $270 level or the $240 level?

Big Losers

There are going to be a few big losers in the streaming wars, really big losers. My thought is that companies like NBC Universal, Warner Media, and even Disney believe one of two things. One, they think consumers will leave Netflix for their offerings or two they believe consumers will add their streaming service in addition to Netflix.

Tackling the first belief, a small number of customers will leave Netflix for other streaming services. "Friends" and "The Office" in addition to what else Netflix had to offer made the service great.

Source Warner Media

Issue two, if consumers attempt to pay monthly subscription fees for multiple streaming services, they're going to end up with something that looks like their old cable bill. Which I think will lead to some hard decisions, like which service do I watch the most and which service(s) should I cancel? This is when and where we'll start to see companies take losses on their streaming services. Disney's $6.99 price for Disney Plus was extremely smart on the part of the company, it makes it affordable enough to add on to a Hulu or Netflix subscription. Will NBC Universal and Warner Media do the same with their streaming services?

Buy on Blip, Sell on Trend

I'm going to follow Uncle Warren here and be greedy when others are fearful. The closer to $300 the stock price gets the greedier I'll be. As I've written before I believe Netflix wins the streaming wars. I think their spending on new content will pay off, it will bring new subscribers to the platform. They seem to be taking a slow and long-term approach to the India market, something I didn't discuss in this article, but it's an approach I favor. I think this current earnings fallout is a blip in the overall Netflix growth story. Also, at this price level, it's a good place to put a toe into the water.

Did I consider the competition in my buy analysis? Yes, I did. But the competition are old school companies, with old school boards, driven by an old school Wall Street way of thinking. It wouldn't surprise me if Warner Media and/or NBC Universal offers a streaming service for just television content at one price, with an additional charge for access to movie content. It wouldn't surprise me if these new streaming services offer multiple tiers of service, like no advertisements, a regular amount of advertisements, and an advertisement lite version. I see these companies attempting to extract every dollar they can from their subscribers, and not creating a unique viewing experience for their subscribers. But we'll see.

Netflix is a BUY, a speculative scary buy, but a buy.

This is where I leave you with a BUY on Netflix. Thanks again for checking this week's In Focus.


What is The Seville Report

The Seville Report is our attempt to bring world class investment research to people who feel world class investment research isn't available to them. We also want to demystify the stock market for people who wouldn't normally think of putting their money in the stock market. Our research comes quarterly via our newsletter, The Seville Report. We use the website and this blog to share thoughts and ideas about the markets and different companies.

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