In this article, I will tell why I’m bullish on Netflix’s (NASDAQ:NFLX) stock ahead of the company’s third-quarter results release.
I believe that the company’s expectations and sentiment are particularly bad and that market concerns are exaggerated. Netflix stock, in my opinion, remains appealing because of the company’s business strategy, which is likely to create significant free cash flows in 2022 and beyond. Furthermore, management guided that content costs will be steady in the near term, implying that free cash flows will accelerate in the coming years as the business benefits from previous big content expenditures.
In addition, I believe we are beginning to see some stabilization tendencies in terms of Netflix maintaining its leading position in the streaming industry and improving fundamentals on worldwide app downloads. The excellent second-quarter results signal that we may see a beat on low expectations in the upcoming Q3 2022 reports. Finally, I believe that Netflix’s two new efforts, which aim to monetize the many shared accounts on the platform and provide an advertisement-supported tier in November 2022, will be successful. These projects will produce long-term income and profitability for the company, helping to boost Netflix stock.
Tier Pricing With Strong Possibilities Based on Advertisement
Netflix announced the cost for its advertisement-supported tier, which will be $6.99 in the United States, a 30% discount from the basic tier without commercials. The ad-supported tier will be available in 11 additional markets, with a comparable 30% savings from the base rate without commercials. The advertisement-supported tier will be available in these 12 markets beginning in November. The new advertisement-supported tier, in my opinion, will be accretive to its long-term revenues and profitability, but it may take some time for the firm to expand.
I predict the new advertising-supported tier will increase the company’s revenue by 10%. This takes into account a fraction of existing customers in the current basic tier who may want to downgrade to the advertisement-sponsored tier, new customers attracted by this new tier, and the predicted decreased churn due to the platform’s diverse range of plans. As previously said, the advertisement-supported tier will be primarily focused on recruiting price-sensitive clients who do not mind commercials. However, 2023 may be a transition year as the new advertisement-funded tier begins to roll out. It will likely face difficulties on the foreign exchange front and some upfront expenditures.
Netflix Stock Valuation
Netflix trades at a considerable discount to its 5-year P/E range, with the stock currently selling at 20x 2023 P/E. While competition has intensified in recent years, I believe Netflix now appears to be a more viable and self-funding corporation than it did five years ago. Furthermore, if its new growth strategies are successful, Netflix may have a more extensive growth profile in the future.
Risks of Subscribers Missing Out
As previously said, one of the significant metrics the market is currently looking at is the potential to beat subscriber expectations. While I contend that subscriber growth expectations have been set low, if the firm experiences additional headwinds in the quarter, we may see the company miss subscriber estimates once more. If this is the case, the company’s expectations will be revised downward since the market remains uncertain about the direction of subscriber numbers.
Competition
The advent of numerous alternative streaming platforms that compete directly with Netflix is one of the reasons for Netflix’s slower growth profile today. Previously, as a pioneer in the streaming space, Netflix was the first in the industry with no material competition since it invested in the best content. However, several other large corporations, including Amazon (NASDAQ:AMZN), Disney (NYSE:DIS), and even Apple (NASDAQ:AAPL), have entered the streaming industry. As a result, Netflix must compete for market share as consumers have other streaming options to select from. In my estimates, I have factored in the dangers of competition, such as slower growth and lower margins, but there is still a chance that rivalry may push Netflix’s growth and margins further lower.
The Macroeconomic Environment Is Deteriorating
If the global macroeconomic situation softens or consumer sentiment deteriorates, Netflix’s predictions may need to be revised downward. The macroeconomic environment will impact streaming platforms such as Netflix as consumers reduce discretionary spending and consolidate the number of streaming platforms to which they subscribe. Although the advertisement-supported tier may be beneficial in a bad economy, management will need time to implement the new advertisement-supported tier, which may result in a loss of subscribers and revenues in the interim if the economy weakens.
Content Expenses
I’d like to emphasize that Netflix has already forecasted a flat content cost for the next few years. That said, I believe there is a risk that it will need to spend more on content to compete with its rivals as other players begin to spend more on content to produce quality movies and films. As a result, if Netflix ever needs to match its competitors’ expenditure levels and create superior content, its free cash flow position may suffer.
Price increases
I believe Netflix’s ability to raise pricing in the near term may be limited, particularly if the macroeconomic environment deteriorates. As a result of tighter consumer pockets, rising membership costs may result in a proportionally greater loss of customers and a net loss situation. This might be bad for Netflix in the short term if price increases are no longer in its game plan.
Netflix Stock Is a Buy
In the coming Q3 2022, I believe we should keep an eye out for subscriber figures and further information on the monetization of shared accounts. With the recent announcements for the advertisement-supported tier price and launch in 12 markets, I believe investors will be more interested in Netflix stock, as they will be wondering about the potential benefits the company could experience from the new advertisement-supported tier. Furthermore, we are observing stable trends for Netflix’s market share and app downloads globally, which will likely improve further with the new advertisement-funded tier. Finally, we saw in the Q2 2022 reports that estimates for subscriber numbers were excessively low, and we could see a similar beat on subscriber counts as we approach Q3 2022. More importantly, the company remains on schedule to generate $1 billion in free cash flows in 2022, which I believe will accelerate in the future. I rate Netflix stock as a “Buy.”
Featured Image – Megapixl © Twindesign
