Hey everyone, I just finished digesting the $NFLX earnings report and interview:
I'll summarise a few key numbers, then dig in to some of the things mentioned in the interview.
Total Membership: 130.14 Million (125 last quarter)
New Q2 Membership: 5.45 Million (8.26 last quarter) (6.2 forecast)
Revenue: $3.91Bn ($3.7 last quarter) ($3.94 estimated)
My thoughts During the Interview there were several questions and answers that got my attention.
When questioned about the weaker than expected results, Hastings displayed confidence and suggested that the underlying fundamentals they look at regularly such as viewership is still growing among users. Considering the quarter was relatively light on new content compared with the previous quarter the viewership reference is reassuring.
David Wells responding to a similar line of questioning was quick to point out that Q2/Q3 have always been slower on membership growth than Q4 and Q1.
The big question on every investors list “What about Disney?” was broadly shrugged off again by the team, even after the interviewer pushed on the question a second time. They were unwilling to share any specific numbers for how much of their content is supplied by Disney, the popularity of it or viewership figures. They basically gave the same answer as last quarter, that they are focused on their own content, they have been planning for this for years, and that it is up to them to cancel their current deals with Disney for their ongoing original content, created by Disney. I’m not sure if they are afraid that investors will be scared off if they see how much Disney content impacts their users, or if they have another reason for keeping that information to themselves, but it certainly reassures me that holding onto some $DIS shares could be a sensible precaution as we get closer to seeing the effects of their competition in this market.
At the end of the call there was a question about anything that they see as a big improvement to the product that is coming down the line. One of the answers given perhaps hinted towards more user interaction during viewing. David Wells said “the ability for all those folks to enjoy and see a story, and discuss that story in the same moment is great” - The phrase “discuss that story in the same moment” when talking about improvements to the product was interesting, perhaps it’s nothing, or perhaps Netflix is working on adding reaction emotes, chat or something else to enable users to interact (and importantly for Netflix give live feedback during shows) would be very cool. Again, this is probably just me reading too much into what he said, but it seems like it would be a good feature both for users and for Netflix when analysing viewer experiences.
From a technical perspective a drop to anything below 350 feels oversold and undervalued. Remember, both before and following the Q1 earnings $NFLX hit 330+, this was during a period of uncertainty in the markets at the start of the year. There is also a small support level at 350 which should act as support for the drop, anything below this would signal a strong buy for me. I’ll also be looking to add to my position a little before we drop that low.
My current positions have opens ranging from 350-415 with an average open of 380. I expect we will end the week at around a 2% unrealised loss on my combined Netflix positions. It looks likely that the price will fall to 350 before settling between 360-370 which I think is a more fair price given the strong revenue despite missing on user adds.
Overall, I’m still very confident in Netflix’s long term potential. There is plenty of room in this market for them, $DIS , HBO, $AMZN and everyone else. Importantly Netflix have been planning for this a long time. Although this quarters results are not great, I still expect strong growth above average for the Nasdaq and if anything the volatility from this earnings is a reasonable trading opportunity. That being said, I’m confident that $DIS above $AMZN and $AAPL will become a major competitor in a few years.
I will not be closing any positions based on this call, but will instead look to add a few more should the price drop below 350 and again at 330.