When Netflix (NASDAQ:NFLX) reported its third-quarter financial results, many investors were focused on the company's revenue and earnings per share. But the pandemic has altered the landscape, providing a few additional insights. Two key metrics -- subscribers and free cash flow -- combine to give a sneak peek at what the future could hold for Netflix shareholders.
Jason Hall: Danny Vena is going to join us. Netflix earnings are out. Danny had some time to dig in. Highly anticipated report. A lot of people want to know what Netflix had to say. Danny, so how did Netflix earnings go? What do our followers need to know most?
Danny Vena: Well, I want to set the stage first and just briefly, so far this year, for the first six months of 2020, Netflix had already added more than 25 million, almost 26 million subscribers, which is nearly as many as it had added in all of 2019. That was going in, Netflix management had said, they're trying to rein in expectations saying, we're only expecting 2.5 million subscribers this third quarter, which was surprising considering they had 15 million and 10 million, respectively, over the first two quarters. Well, it turns out that Netflix management was just about right on the money.
Hall: That's pretty normal, right? They usually are really close with their estimates.
Vena: I'll tell you. I will take Netflix management's estimates over just about anybody else's every day of the week.
Hall: Twice on Sundays.
Vena: Twice on Sundays. It turned out that management said 2.5. It was actually 2.2 million new subscribers, which was really only a third of what it added in the prior-year quarter, and it was down 80% sequentially. That gives you an idea of what management had warned about, that they were pulling forward growth from later in the year, which turned out to be exactly true. The 2.5 million brought the total to 195.15 million, which was up 23% year-over-year. Now, there weren't really any problems. There weren't any surprises with revenue and earnings per share. Revenue of $6.44 billion was up just slightly ahead of both management's forecast and analysts' consensus estimates. Earnings per share was actually a little bit lower on both counts. But that said, the other key number besides subscription growth that investors have been watching closely is Netflix free cash flow. Now, the company generated positive free cash flow of $1.1 billion, which makes this the third consecutive quarter that the company has been in the plus column, which has been unusual. Investors in Netflix know that the company has been generating negative free cash flow for quarter after quarter, year after year since it began producing its own content. Netflix management even said, "don't get used to this." In fact, for the fourth quarter, they're saying they expect free cash flow generation to be slightly negative. Putting them on track for free cash flow of about $2 billion for the year. But the free cash flow generation is going to dry up as soon as the company brings its content creation and production facilities back online. It's been gradually doing that. So don't expect to see that free cash flow next quarter or for a number of quarters going forward.
Hall: But Netflix is playing a long game, right? They're building out their content library of owned content. They don't have to rely on losing Disney (NYSE:DIS), losing content as you're starting to see on Comcast's (NASDAQ:CMCSA) Peacock, right? Some of the MVC content that they've lost. They're playing a much longer game with making sure they own content that's going to resonate with viewers. I'm going to put you on the spot here, Danny, I want to ask. So it looks like Netflix stock's down after hours, which is not out of the ordinary when whatever estimates analysts who put out there, turned out to be wrong because they said something different than what management said. They just won't learn their lesson. So stock's probably going to be down tomorrow. It's still within striking distance of an all-time high, but it still looks like probably tomorrow, it's probably been open about 10% below an all-time high. Is Netflix worth buying right now? What do you say?
Vena: For me, personally, and just so that people know that I have skin in the game, Netflix represents about 15% of my entire portfolio. Not because I backed the truck up at any point and piled into Netflix like a crazy man. But because I bought a small portion of Netflix back a dozen years ago, and it has grown to that. I have done my best to add around it as much as possible. That said, I think that Netflix is still a buy-and-hold for the long term. If you look at management's comments in the shareholder letter, one of the things that stood out was they said, particularly in the Asia-Pacific region and in Latin America, their growth is still going gangbusters there. There is still a whole big world out there. There are still hundreds of millions of more subscribers to be had in the international markets. Netflix is gradually chipping away, gradually adding new local-language content. I think, buy Netflix on the dip.
Hall: Danny, thanks for coming on and giving us the low-down on this high-interest company. Last I checked it less than 200 million subscribers, 200 million down, 7.3 billion to go. That's how we can think of it.
Danny Vena: Absolutely.
Brian Feroldi: I don't know what you're talking about, this stock's going down 5%, I'm selling. Thesis busted (laughs).
Hall: House money, right? Love it. Love it. Thanks, guys. Daniel Sparks, anything to add?
Daniel Sparks: Great update, Danny, I will just say, just while it's fresh on everyone's mind, I think it's worth doubling down and emphasizing on the fact that they really do provide their internal estimates. It's not like, you know, everyone else, they have their internal forecast and then they have what they provide to investors. So Netflix sometimes comes in below. But that's because they're not saying, "here's our conservative estimate that will likely be." They're saying like, "this is literally the best guess we have and we're handing it right over to you." Sometimes investors forget that Netflix does that, especially when they miss it by just a couple of 100,000 on this time. But yeah, worth emphasizing.Hall: They also have the best information to go on based on estimating how they're going to do. I think that's really good.