Wall Street's initial reaction to the latest financial results out of Netflix (NASDAQ:NFLX) was uninspiring. The stock inched lower after posting its second-quarter numbers after Tuesday's market close.
It wasn't a perfect report. A sequential dip of 400,000 subscribers in the U.S./Canada region isn't a good look. Its guidance for the current quarter was mixed. However, there is still plenty to like in the update. Let's go over some of the things that should make new Netflix investors and longtime shareholders like me smile.
1. Game on for Netflix
There were reports late last week that Netflix was ready to introduce gaming into its platform, and reality lived up to the hype. The world's leading premium video-streaming service made it official in Tuesday afternoon's report, announcing plans to roll out gaming features for subscribers at no additional cost.
The diversions will initially be available on mobile devices, but ultimately accessible across all platforms that members use to stream entertainment. There is no timeline for the launch of this offering. Netflix admits that it's still in the early stages of this expansion. However, Netflix wouldn't be so chatty about this -- knowing that the competition can try to steal its thunder in this niche -- if it wasn't close to happening.
How good will the games be? Will they prove magnetic beyond a particular franchise's fans? Time will answer the questions, but for now it's a smart move by Netflix to make its service harder to cut loose.
2. It's a beat where it counts
Netflix stock took a hit last time out, largely the result of falling short of its first-quarter subscriber target. This report wasn't a repeat performance. Revenue rose 19.4% for the quarter, fueled by an 8.4% increase in subscribers and a healthy gain in average revenue per subscriber. Three months ago it was targeting an 8.1% uptick in comps resulting in an 18.8% year-over-year gain on the top line.
One can argue that favorable foreign exchange translations helped prop up average revenue per user -- and revenue -- in the second quarter, but this should be baked into Netflix's guidance back in April. Netflix did miss on the bottom line, but is this really an earnings story at this point? Netflix beat its forecast by growing its subscribers worldwide at a headier clip than it was modeling, and that's actually a pretty impressive feat since it overcame a significant sequential dip closer to home.
3. The runway is still long
It may seem like we're doing a lot of streaming these days, but Netflix leaned on Nielsen data showing that linear TV continues to account for 63% of the country's screen time. Netflix is the top dog among streaming service, but it's only at 7% of the total U.S. screen time. Even on a global basis Netflix has only penetrated 20% of broadband-fueled homes -- and that market will continue to expand with Netflix ideally taking a larger share.
Netflix remains sticky even with that sequential dip in North American subs. Last year was an anomaly with all of the sheltering in place, but compared to where the platform was two years ago engagement per member household is 17% higher.
Netflix has always been the class act among streaming service stocks, and there was nothing in Tuesday afternoon's report to lead one to think otherwise. It wasn't a textbook blowout, but once again Netflix is earnings its keep as a generational growth stock.