Any Weakness in Netflix Is an Opportunity for Growth Investors

Netflix, Inc. (NFLX, Financial) is one of the companies that has shaped the bull market performance since the fallout of the global financial crisis in 2008, and its journey has been truly remarkable. From a DVD rental company back in the day, Netflix has come a long way to become the leading player in the global over-the-top content streaming industry, which is one of the fastest-growing business segments today.

The market has not been oblivious to this success, and the company continues to be valued at very high valuation multiples. That said, I think the premium paid by the market can still be justified considering the stellar growth the company is seeing, and any weakness in the stock price is an opportunity for growth-oriented investors.

Netflix to report earnings soon

The streaming giant is scheduled to report fourth-quarter earnings later today on Jan. 19, the first trading day of this week. Wall Street projects the company to report earnings per share of $1.41 based on revenue of $6.62 billion. Netflix missed earnings estimates in each of the last three quarters, and the stock price has remained flat since last July.

One of the primary reasons behind earnings misses was the very high expectations of analysts, which the company eventually could not meet. Missing estimates might give the false impression that Netflix is seeing lackluster growth, which is far from the truth. The below table provides a summary of earnings and revenue growth in the last four quarters on a year-over-year basis.

Source: Company filings

Many investors and analysts will be keeping a close eye on subscriber growth numbers as it gives a good indication of whether the company is continuing to attract new users with its content, which is the single most important growth factor in the long run.

Competition is intensifying, but Netflix is still the leader

There are many subscription video streaming companies in the world today, and all these companies are fighting for a piece of the same pie. Even though the likes of Hulu and Amazon (AMZN, Financial) Prime tried to tap into this industry and threaten to take away subscribers from Netflix, it has proved to be a too difficult task. The first-move advantages enjoyed by Netflix, coupled with its deep content library, helped them easily thwart the threat posed by its closest rivals with ease.

Disney+, the streaming platform launched by The Walt Disney Company (DIS, Financial) in late-2019, is the fiercest contender. Disney is equipped with both the content and the expertise required to grow its subscriber base exponentially in international markets, and its strong footprint in India where Netflix has historically struggled tilts the odds in favor of Disney when it comes to capturing market share in the lucrative streaming industry.

One key aspect of the streaming industry is that this is not a winner takes all market. A subscription to Netflix at the standard rate costs less than $15 per month, and a Disney+ subscription comes at less than $8. Because of these low price points, many consumers are active users of multiple video streaming platforms. This characteristic will help Netflix maintain its leadership position in the market for quite some time.

Another advantage is Netflix's understanding of consumer behavior. The company spends billions of dollars every year on developing and maintaining a robust system driven by Artificial Intelligence technology to identify patterns among certain groups of consumers and then invest billions of dollars on producing original content to cater to these trends and interests. This business model has seen massive success over the last few years, but it took Netflix many years to develop this robust strategy. Newcomers, including Disney+, will face an uphill battle in their initial years in trying to develop such a strategy based on user interests, and this leaves Netflix ample time to mitigate the threat posed by its competitors. In other words, it would be very hard for a competitor to dethrone Netflix as the leading player in the streaming industry.

There is more leeway for growth

The subscription video streaming industry is yet to make meaningful progress in Asia, the most populous continent in the world China's doors remain closed for international players including Netflix, but the increasing household wealth and the expected improvements in the internet penetration rate in all other Asian nations create a good opportunity for Netflix to grow its subscriber base.

Taking this opportunity into consideration, RBC Capital Markets analyst Mark Mahaney projects Netflix to grow its subscriber base from 195 million at the end of last September to around 500 million by 2030. Even if the subscriber growth rate declines, Netflix will still be able to increase its profitability by using carefully planned price hikes, which have been proven to be very successful over the last few years.

Gurus are bullish on Netflix

When the majority of gurus are bullish on a company, it is a sign that the company is meeting or exceeding the expectations of the smartest minds in the industry. As illustrated below, the bulk of guru trades have been "buy" transactions since early 2019, even though the stock has continued to reach new highs during this period.

Source: GuruFocus

The positive stance of gurus is not an indication of an investment opportunity in and of itself, but is usually a positive sign when combined with other factors such as strong earnings growth and favorable macroeconomic conditions.

Takeaway

Netflix is not valued at cheap prices in the market, but as is often the case, the best investment opportunities can be found in wonderful companies that are trading at fair prices. Value investors are very unlikely to find anything interesting with Netflix because of the premium attached to the company by the market, but I think growth investors with an above-average risk tolerance could consider adding Netflix on any weakness, as a slowdown in growth is unlikely in the foreseeable future.

Disclosure: The author does not own any shares mentioned in this article.

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