Should You Buy Netflix Stock After Q3 Results?

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The market has mixed feelings about Netflix‘s (NASDAQ: NFLX) third quarter results. The headline rose and fell a few percentage points in each direction in the days following the report.

There was a lot of information to digest, including the effects of the popular hit show. Squid game, so let’s dive in to see if now is the time to buy Netflix stock.

Image source: Getty Images.

Revenue and Subscriber Growth Fuel Profits

The streaming content pioneer reported third quarter revenue of $ 7.48 billion, an increase of 16.3% from the same quarter a year ago. The growth rate was a deceleration from recent levels. However, Netflix is ​​following a fiscal year 2020 which saw its revenue increase.

It is impressive that the company has retained much of the business it attracted during the pandemic. Management pointed out that retention rates tend to be higher than in 2020 and 2019. People who signed up to Netflix during economic lockdowns stick around even as economies reopen.

Netflix added 4.4 million new subscribers in the third quarter, better than the 3.5 million estimated by management. Popular hit show Squid game contributed to the increase. The Korean-language show was the most watched show on Netflix. A record 142 million people listened to the series which first appeared on the streaming service on September 17. Netflix now has 214 million streaming subscribers and expects 8.5 million more to join in the next quarter.

Luckily for shareholders, Netflix is ​​turning revenue and subscriber growth into profit. The company reported operating income of $ 1.75 billion in the third quarter, up from $ 1.3 billion in the same quarter last year. The streaming service’s business model has built-in efficiencies of scale. It costs Netflix roughly the same price to show the same movie to 100 million people as it does to show it to 200 million people. As it adds new subscribers, profit margins are expected to increase.

And that is precisely what is happening at Netflix over time. Between fiscal years 2015 and 2020, the operating profit margin increased from 4.5% to 18.3%.

Netflix has great prospects at a reasonable price

Despite Netflix’s excellent progress in building the business, there is still a long avenue for growth. Management estimates that there are 1 billion linear television subscribers worldwide. However, in recent years, more and more people prefer to distribute their content instead. Streaming services offer more value by allowing you to watch on multiple screens, often costing much less than the alternative, and do not require the installation of professional equipment.

One of the risks Netflix faces is the entry of media giants into the streaming industry. Notably, Disney recently took a big step forward and attracted 174 million subscribers for its three streaming services (Disney +, Hulu, and ESPN +). However, the foray of new competitors entering the streaming industry could help Netflix. If consumers have more content than they can buy from streaming services, it could make it easier to opt out of linear TV. And the low prices of streaming services could allow households to subscribe to several services while paying less than traditional cable.

Overall, Netflix has great prospects in the short and long term, and the title isn’t expensive. Trading at a price / earnings ratio of 67, it is selling near the lows of the past five years. Now is the perfect time to buy Netflix shares following the release of its third quarter results.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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