Netflix (NFLX -9.09%) 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.
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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.
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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.
