Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Netflix Investors Shouldn't Worry

By Neil Patel - Updated Apr 28, 2021 at 10:22AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After a disappointing first quarter, shareholders might run for the exits. Don't be one of them.

Netflix (NFLX 2.90%) did not satisfy investors with its first-quarter 2021 results, signing up 4 million subscribers worldwide in the three-month period and forecasting a paltry 1 million new members in the second quarter. 

Investors pushed share prices down 8% immediately after the announcement. This is not surprising, given the sharp slowdown coming off the company's historic performance last year. 

Although it's tempting to automatically adopt a bearish stance on the stock, I think investors need to keep their focus on the long term. Netflix is still a solid investment. Here are three reasons you shouldn't be concerned about the leader in streaming entertainment.

man sitting back and smiling at his desk

Image source: Getty Images.

1. The growth isn't over 

Stalling subscriber growth in the U.S. is top of mind for shareholders these days. Netflix only gained 450,000 customers in the U.S. and Canada last quarter, suggesting that expansion must come from other regions of the world. 

But let's consider that in 2010, the number of pay-TV households peaked at 105 million subscribers. I'm not saying that Netflix can fully reach that figure domestically, but it does portend that there could still be a way to go. Furthermore, as more households finally get broadband internet access (currently at 80% penetration), they'll be able and willing to subscribe to streaming services. 

For $13.99 per month (the Standard plan), a subscriber gains access to $26 billion worth of content. This is a mind-boggling value proposition for consumers. And Netflix will not shy away from periodically asking its members to pay more. The last price increase helped boost revenue by 24% in the first quarter. 

Rising penetration in overseas markets, particularly Asia, will also support Netflix's growth. Management mentioned heightened confidence in potential growth from Japan, South Korea, and India. India will offer a massive opportunity for Netflix in the years ahead. 

2. The king of quality content 

A bevy of new streaming services have been launched recently, but none can compete with Netflix's $17 billion content budget this year. The business' first-mover advantage has put it in a position to spend more than its peers, while at the same time spreading these expenditures over 208 million paying users. Financially, rival upstarts have no choice but to burn through cash if they want any chance of keeping up. 

And the content Netflix produces is very good. An impressive 35 Oscar nominations this year are more than Amazon and Walt Disney combined. This prowess in film is paired with the same level of skill in creating hit series, often with broader cultural impacts.

right hand holding remote watching streaming TV

Image source: Getty Images.

Late last year, The Queen's Gambit (62 million viewers in the first 28 days) spurred increased sales of chessboards and reignited interest in the game. Additionally, the French-language series Lupin, with 76 million viewers in the first 28 days, has become the most successful non-English show in the company's history. The book that the series is based on also experienced a surge in sales.

Netflix has clearly demonstrated its expertise in content production. It's no wonder that engagement was up and member churn was down in the most recent quarter compared to the prior-year period. 

3. A stronger financial position 

Management hinted last quarter that Netflix is close to generating positive free cash flow sustainably. But the most surprising news from last Tuesday's earnings announcement was a newly authorized $5 billion share repurchase program.

This development is a win for investors for two reasons. First, it shows that Netflix no longer needs to raise external capital to run its business and fund its content spend. Not having to rely on capital markets is a good thing.

Second, it will provide a glimpse into how management thinks about the stock's value. Netflix CEO Reed Hastings made an aggressive push years ago to borrow money and invest in content because he was convinced streaming was the future of entertainment. His adeptness at capital allocation has already been proved, so investors should trust his judgment when the company does decide to start buying back shares this quarter.

Investor takeaway

When a company as widely followed and scrutinized as Netflix has a disappointing quarter, it's understandable that investors will worry. Thoughts about slowing growth and rising competition have hurt share prices recently. It would be wise for long-term investors to take this weakness as a buying opportunity. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$179.95 (2.90%) $5.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.