Netflix (NFLX, Financial) shares declined for more company-specific, fundamental reasons. During the second quarter, Netflix provided a weaker than expected outlook for both subscriber growth and profit margins. After meeting with management and scrutinizing our investment thesis, we lowered our estimate of its business value to account for softer near-term business fundamentals. However, we believe the decline in the company’s share price far exceeded the decline in its business value. Netflix now trades for a discount to the S&P 500 on next year’s GAAP earnings, despite our view that the company remains a better than average business run by a highly accomplished management team. We believe the company’s lead in streaming remains intact and we expect future operating margins to be substantially higher than today’s levels. Furthermore, we are encouraged by Netflix’s potential to enhance revenue growth through advertising, the monetization of password sharing and further penetrating international markets. These efforts are not without risk, however, and we have done our best to treat them accordingly in our valuation.
From Bill Nygren (Trades, Portfolio)'s Oakmark Select Fund second-quarter 2022 commentary.
