The Netflix Outperformance Machine Is Just Humming Along

In this segment from MarketFoolery, host Chris Hill is joined by Million Dollar Portfolio's Matt Argersinger to discuss a story that feels a bit like a rerun, but that never gets old -- unless you're waiting for a stock price pullback that will give you a better entry point to buy in. 

Netflix (NFLX -3.92%) revealed its first-quarter numbers Tuesday, and Wall Street applauded -- no shock, given its nearly 7.5 million net new subscribers globally. The guys put this latest win in context.

A full transcript follows the video.

This video was recorded on April 17, 2018.

Chris Hill: We're going to be heavy on the video stocks today. I should start by expressing my condolences for our friend and colleague Taylor Muckerman, because on yesterday's episode, Taylor was talking about how he was really hoping that Netflix was going to put up a terrible quarter so that there would be a pullback in the stock so that he could buy some shares. In fact, the exact opposite happened.

Matt Argersinger: Yeah. Sorry, Taylor! That didn't work out for you.

Hill: First quarter report from Netflix, nearly seven and a half million subscribers added worldwide. Shares of Netflix up 8% this morning. [laughs] That's the sound of both of us shaking our heads. What stood out to you? Was it the global beat?

Argersinger: To me, the subscriber numbers are everything. That's what the market has decided to focus on, obviously, because if you're looking at the profits or the cash flow, eh. But, what actually stood out to me was not so much the global beat. I thought the global subscriber numbers would be big, but they added almost two million net subscribers in the U.S. Which, I don't know how many households are left that don't have Netflix, but apparently, it's still many. I'm surprised that that number is still growing as fast as it is. So, that was surprising to me.

But then, yeah, almost five and a half million net additions internationally, that's huge. Overall a 26% year over year increase in total subscribers to 125 million. And remember, they raised prices this last year. I think that's probably what's galvanized investors and the stock price. This is a service with pricing power, it's as popular as ever, and visions of adding tens of millions of more subscribers in the years to come. I can see why the market is excited.

Hill: And it seems like they have, I don't want to give Amazon all the credit here, but if you look at the value proposition of Amazon Prime, it appears as though Reed Hastings and his team at Netflix are operating from a similar level of confidence in this regard: "We feel like our service is so good that if we can just get people to try it, they're going to stick with it." And when you look at the partnership with Comcast, when you look at the telecoms, the mobile carriers that are including some version of, "Hey, we'll give you three months of Netflix for free," that sort of thing, I think that as much as anything is probably continuing to feed into the U.S. growth.

Argersinger: I totally agree. What Netflix has done over the past several years is invest in so much content. Now, if you try Netflix for a month or two, there's a high likelihood you're going to find at least something that you like and are going to want to watch on Netflix. So, what I'm looking at in terms of what they planned just for this year, they're going to spend about $8 billion on content, which is a staggering number. That's more than the biggest media companies in the world spent on content on any given year. They're going to release 700 original pieces of programming, and that includes about 80 movies. That's more than any film studio. They're going to release a stand-up special roughly once a week, and as many unscripted series as any U.S. cable network. So, if I get on Netflix, I'm going to find some things that I like, you know? And, again, the price, depending on what plan you're on, but, $10 a month for Netflix is still not a big hurdle for a lot of people who go to it for entertainment at least several times a month.

Hill: I don't know to what extent, if any, on the conference call, marketing costs were discussed, but I did see that Reed Hastings, I think it was he or someone on the call, called out the Super Bowl ad that they bought promoting the Cloverfield experiment movie -- I'm botching the name of it, but calling that out, calling that a successful move on their part. I think a lot of investors have looked at this company and said, "Yeah, they need to invest in content, that's money well spent." It seems like there's at least a little bit more talk now coming from Netflix about the money they're spending on marketing, and presumably that needs to ramp up as well. And I don't know if it's anywhere near the point where it's concerning.

Argersinger: I don't think it's concerning, but you're right, that's going to be another big source of expense. That's in addition to the $8 billion that they're going to have to spend just on creation of content, licensing of content. But I do believe the billions that they're going to spend on that are money well spent. Because, like I said, I'm not interested in Cloverfield, but guess what? Probably several million people are, so they tried Netflix to get into the platform and see what else is out there.

I will say this: as of this morning as we tape, Netflix's market cap, $140 billion. So, 125 million subscribers, do a little math, the market is valuing each Netflix subscriber at about $1,100 each. Now, I am not an expert when it comes to lifetime value, valuations and models and things like that, but that's a pretty expensive multiple for any subscription business. So, what the market is clearly saying is, this is a platform that should, in a few years, have 200 million, 300 million, eventually maybe 500 million. I know our colleague here, David Kretzmann, put out a tweet the other day, reckless prediction, he thinks Netflix will have a billion subscribers worldwide. You know, maybe, it's possible. But, clearly, the market is definitely valuing it as that. This is now one of the biggest companies in the world. And they do one thing really, really well, and the market seems to appreciate the growth in subscribers.