Netflix Q2 - Market Liked The Numbers

On Tuesday night Netflix released their second quarter results. This was a hotly anticipated release because in the previous quarter, the company showed its first subscriber loss in a decade and the share price was pummelled. The company expected to lose two million subscribers this quarter but only lost 970 000. The share price jumped 10% in aftermarket trading.

It is quite obvious at face value that Netflix is going through a slump in subscribers. The share price reflects the stalled growth. The opportunity now lies in Netflix making a comeback quicker than markets expect.

There are three main reasons Netflix subscriptions have slowed. They are coming down from a period of huge growth caused by global lockdowns, increased competition and soaring inflation (consumers are more price sensitive). But even if you assume that subscribers will be flat for a while, there is still an opportunity to make money because the business is maturing and becoming more profitable.

In the shareholder letter, management expects free cash flows to grow substantially into 2023 because they have finally pivoted from licensing third-party content to becoming content creators. 60% of their content assets are now Netflix originals. It has been a long and expensive journey to become creators of their own destiny.

The existing business is reaching maturity, but there are two big potential kickers: income from advertising and finding a way to make the freeloaders pay. Trading at 20 times 2022 earnings we feel that most of the bad news has been factored into the share price. Keep holding this one, there is still some juice in that orange (is the new black).