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On Thursday night last week, after the bell, Netflix reported their second quarter numbers. Before I go into the numbers lets remember that Netflix is a business that has benefited from economies around the world going into lockdown. The share price has reflected that. When the rest of the market was collapsing, the NFLX share price barely budged. So far this year the share price is up 51%.
When Netflix numbers come out, all eyes are on subscriber additions and subscriber forecasts. Depending on the beat or miss, the share price can have wild swings. Last week was no different. Net adds were big. They have 10.1 million new subscribers after adding 15.8 million in the first quarter of the year. Take a look at the graph below for the Corona bump.
It was guidance that disappointed. Management expect to add 2.5 million next quarter versus market expectations of 5.4 million. The share price drooped 15% at one stage. It ended up closing down 6.5%. Like I said earlier, the share price is up 51% so far this year after that drop so lets not be too greedy.
The increase in subscribers resulted in a 25% increase in revenues. Earnings nearly tripled from this time last year to $720m. Netflix has the potential to be very profitable as the subscriber base continues to grow. That is why they always trade at a lofty valuation.
The biggest challenge for Netflix now is content. While subscribers have been increasing, studios have been closed. To deal with that, their head of content, Ted Sarandos, has been appointed co-CEO next to Reed Hastings.
Fortunately their content production lead time is long. They have enough quality content for the rest of the year. But once the studios open (they already have in Asia) production will have to work day and night to get the content ready. Netflix is content (Tiger) king and we back their execution skills.
The world has changed. People are working from home and less time is being wasted in meetings, driving or bantering in the office. That gives people more time for themselves. We believe most of the new subscribers will remain entrenched and Netflix will continue to go from strength to strength despite the growing competition.
