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Netflix Investors Need to Focus on What Matters

By Rick Munarriz – Aug 22, 2020 at 8:30AM

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There's been a lot of chatter lately about the streaming video service. Let's sift the relevant from the noise.

Opinions on Netflix (NFLX 0.13%) as an investment are a lot like the content on the platform itself. There's never a shortage of perspectives available, but just like the streamer's seemingly bottomless content catalog, the quality of those ruminations isn't uniformly up to snuff. 

The newsy Netflix nuggets that have trickled in over the past week are all over the map. A Credit Suisse analyst put out a bullish note on Wednesday, suggesting that the service is on track to exceed its conservative guidance for subscriber net additions during the current quarter. There's also a Marketwatch article detailing some isolated delivery delays in Netflix's DVD-rental-by-mail business. Finally, there was a social media outcry after promotional materials for an upcoming French film provoked criticism for sexualizing young girls. Netflix  apologized and pulled the promo -- but for now, it's not dropping the controversial movie. 

That all may seem like a lot to chew on for a Netflix investor, but it's pretty simple at the end of the day: Only one of those stories matters. The other two are largely irrelevant to the case for Netflix as an investment.

The cast of Sense 8 raise a toast at a bar.

Image source: Netflix.

It doesn't matter

Let's start with the two stories that won't move the needle for Netflix. I covered the USPS situation at length on Friday. In a nutshell, this is a non-story for investors. The DVD rental service now accounts for just 1% of Netflix's revenue, and since the company covers the postage on its DVD shipments, it actually benefits its bottom line if deliveries were delayed in some cases. 

The issue around the controversial film that's slated to debut on the streaming service come Sept. 9 is more nuanced. The French film Mignonnes (Cuties) is about an 11-year old Senegalese immigrant in France defying her mother's wishes by joining a local dance team, and it won an award at Sundance earlier this year. The culture-clash and coming-of-age film has won kudos from 82% of the critics whose reviews of it were compiled by Rotten Tomatoes. Some of those critics praised the film for how it tackles sensitive issues, but all of that went out the window when folks spotted the Netflix promotional art featuring the four pre-teen dancers in midriff-bearing outfits. The streamer's initial description of the film also played it up as an 11-year old starting to explore her femininity as she rebels to join a twerking dance crew. The film itself is obviously far more layered than either of those made it out to be, so Netflix apologized on Thursday. 

This isn't the first time that Netflix has secured content that stirred up controversy. It won't be the last. In the long run, this minor brouhaha won't matter, and it's hard to imagine any service pulling a critically praised film that won a prestigious award at a major film festival this year. 

It does matter

The real story that investors ought to follow is the bullish insight that Credit Suisse analyst Douglas Mitchelson offered up in his research note to clients on Wednesday. His data shows that Netflix's net additions are pacing ahead of the 2.5 million that the company was targeting for the third quarter, but are still on track to come up short of the 6.8 million net streaming subscribers it added during the same period a year earlier. 

Mitchelson is actually neutral on Netflix, and his $525 price target doesn't predict much upside from current levels. He also points out that global applications have been roughly flat outside of the Asia Pacific region. This is still a positive development. The stock moved lower last month after Netflix posted its second-quarter results, largely due to the weak subscriber guidance it was modeling for the new quarter. Exceeding that conservative mark -- especially after topping more than 10 million paid subscriber additions in the second quarter -- would cool a lot of bearish arguments. 

There's never a shortage of news on this disruptive media company. Investors just need to separate the relevant from the fluff. 

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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