Buy the Netflix Dip? History Says Do It
Expectations that Netflix would experience a pandemic-driven pull-forward of demand have become a reality. The streaming service reported decelerating Q3 subscriber net additions that missed guidance.
Subscriber miss: Global member net additions of 2.2 million were slightly below guidance, and Netflix’s guide of 6 million for Q4 matched consensus. Shares reacted negatively, but remember: Netflix stock was up +60% YTD heading into the print and the company brought in a whopping 26+ million subscribers in the first half of the year.
Asia Pacific leading the way: APAC contributed nearly 50% of total net adds in the quarter, and Netflix achieved double-digit penetration of broadband in South Korea and Japan. Jefferies analyst Alex Giaimo points out that international penetration remains less than 20%, compared to the U.S. at ~65%, leaving a robust opportunity for continued user growth.
India partnerships: India remains a major subscriber growth opportunity for Netflix as it looks to break deeper into the market. Guggenheim’s Michael Morris emphasizes in a recent note that in Q3, Netflix “localized its service to support Hindi within its user interface and launched a partnership with India’s largest mobile-operator, Reliance-Jio, to bundle mobile and fiber broadband plans and integrate Jio set top boxes.”
New narrative: With subscriber growth trending downward, bulls are turning the focus to Free-Cash-Flow and the greater visibility of cash returns. Netflix expects FCF of about $2 billion for 2020 vs. its previous forecast of break-even to positive.
Production back on track: Netflix expects to finish shooting on 150 projects by year-end, bringing its total to 200 for 2020. The Old Guard was the most popular original film during Q3 with 78 million household views in its first four weeks.
Buy the dip? History suggests investors would be wise to scoop up some shares following an earnings-induced pullback for Netflix. The stock has now traded down on 9 of the last 13 reports, according to Giaimo, who upped his price target to $585 from $570.
“If you owned the stock over that time period, you returned +163% vs the NASDAQ +80%. Buying earnings dips has been a winning strategy,” says Giaimo. “We remain long-term Buyers of Netflix, and would use any persistent near-term weakness as an opportunity to accumulate shares.”
