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Why You're Smart to Buy Netflix

By Daniel B. Kline - Updated Aug 20, 2018 at 3:19PM

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Don't let a mildly "bad" quarter scare you away.

Netflix (NFLX 1.98%) does not have a subscriber problem.

Yes, the company added 5.15 million subscribers in its second quarter, after it had forecast 6.2 million, and investors did not like this. But for a company that closed the quarter with over 124 million paid members, the streaming leader's miss was the equivalent of finding out that you have full scholarship offers at four Ivy League schools when you were expecting five.

Sure, it's bad news, but in a market where the cable industry loses subscribers each quarter, Netflix's problem is forecasting, not growth. The company's "stumble" comes after a quarter in which it gained 8 million customers -- a huge number -- and nobody would complain about Netflix adding more than 13 million subscribers through the first half of the year.

Netflix will have varying growth numbers, but in the long term, it's going to keep adding customers. That's one reason you would be smart to buy shares in the company.

The Netflix home screen

Original shows have helped build the Netflix brand. Image source: Netflix.

Netflix isn't worried

During the company's Q2 earnings call, CFO David Wells said, "We think based on the rolling 12 months of growth that we've had compared to the prior rolling 12 months of growth, the U.S. up slightly, internationally up significantly, that the background and underlying characteristics of the business haven't changed." 

Wells noted that nothing has changed the company's belief about its total addressable market. He also said that "we think that the conversion and growth to internet-enabled entertainment is intact, and people are loving it."

The moat is growing

Every time Netflix adds an original show, comedy special, movie, or documentary, the barrier to entry becomes a little bigger for any potential rival. That's why Walt Disney (DIS 3.51%) may be the only company not yet in the streaming space that can viably become a contender.

Even then, Disney had to purchase intellectual property from Twenty-First Century Fox to shore up its offerings. Most players that would consider entering this space won't have Star Wars, Marvel, Disney Animation, and Pixar to lean on. This makes it very unlikely that even secondary players Amazon and Apple will ever truly challenge Netflix.

The world is on board

Netflix has transcended its beginnings as a U.S. brand to become a global player. The company actually has more international subscribers (68.39 million) than it does in its home market (57.38 million).

The company has multiple ways to grow globally. Many countries are only in the early stages of embracing streaming technology. And as Netflix adds more locally created content and translates more of its shows into native languages, it should increase its appeal in foreign markets.

It has a good product

There may well be a saturation point for Netflix. Whether that number is 250 million subscribers or triple that, it remains a long way off. The company has a good product and a growing library of content it can leverage essentially forever.

Netflix offers an inexpensive alternative to a pricey cable bundle. It's not the only choice, but it's hard to argue that it's not clearly the market leader in its space.

Ongoing cord-cutting trends and improving internet (as well as the eventual launch of 5G wireless) favor the company. It also helps that Netflix has gained a reputation as a place top creators want to work. That should keep its pipeline filled with shows that its current and potential audiences want to watch for the foreseeable future.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$195.19 (1.98%) $3.79
The Walt Disney Company Stock Quote
The Walt Disney Company
$109.32 (3.51%) $3.71
Apple Inc. Stock Quote
Apple Inc.
$149.64 (4.08%) $5.86, Inc. Stock Quote, Inc.
$2,302.93 (3.66%) $81.38
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.

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