Media-streaming veteran Netflix (NFLX 2.51%) is heading into next week's second-quarter earnings report in a tailspin. The stock is down by 70% in 2022 and currently trades at prices last seen in 2017. Moreover, each of the last two earnings reports sent the stock sharply lower.
Next Tuesday's report may very well open another trapdoor, but it could also light a fire under Netflix's stock. There are many ways to approach this situation, but two investing strategies appear to be particularly appropriate.
Basic assumptions
Before we get into the details of how to invest in Netflix around this weighty earnings report, let's make sure that we're on the same page regarding the company's long-term future.
Netflix served 221.6 million subscribers by the end of the first quarter. That's 7% above the year-ago reading but down from 221.8 million in the fourth quarter. Furthermore, management's guidance projected a loss of 2 million accounts in the second quarter. This sudden break from many years of rampant subscriber growth made many Netflix investors hit the "sell" button and walk away in dismay.
However, Netflix has shifted into a new gear in recent quarters. Subscriber growth used to be the only business metric that mattered, but that's not really true anymore. The company has refocused on profitable growth instead, which may inspire Netflix to leave some less-profitable accounts on the table in exchange for higher profit margins on the subscriptions that remain. The combination of slower subscriber growth and more lucrative subscription contracts works out to robust top-line revenue growth:
NFLX Revenue (TTM) data by YCharts
And that positive trend line should continue for the foreseeable future, despite the potentially lower subscriber count in the second quarter. Guidance still points to a 9.7% year-over-year revenue increase.
In the long run, Netflix is addressing a global market for media-streaming services that is still in its infancy in many markets. The overarching vision is that digital streaming will completely replace broadcast, cable, and satellite television services. At the same time, more and more countries will gain access to the high-speed internet connections and reliable digital payment systems required to support a subscription-based media platform.
How should you buy Netflix stock in this market?
The long-term targets are massive and Netflix should eventually reach a global market many times its current size. At the same time, each account is growing more profitable.
Against this backdrop, I expect Netflix's business to deliver shareholder-friendly revenue and profit growth for years to come. Therefore, the current share price drop must be a temporary rarity.
If you disagree with these fundamental assumptions, Netflix is not an investment for you. But if you agree with my premise -- that Netflix is comically undervalued with a massive future ahead of it -- you have two sensible options.
1. Buy Netflix today and don't look back. Whether Netflix goes up or down after the second-quarter update, you have made your move.
2. Split your intended Netflix investment in half. Put the first half to work by buying some Netflix shares before the earnings report. The other half goes into buying Netflix shares next Wednesday or later.
The second alternative lets you split the difference between current prices and post-report moves. You may feel better doing it this way, especially if the stock goes down again. Furthermore, it gives you the option to stick with just that half-sized investment after seeing the actual earnings report. Flexibility is a fantastic personality trait for long-term investors, and I have nothing but respect for this approach.
That being said, even a full-throated Netflix investment before the report isn't necessarily the end of the story. Depending on your supply of investable cash and the reported data, you might want to double down on your Netflix buy next week.
Either way, I think it's silly to let this buying window close up without taking any action. Investing is a marathon, not a sprint, and Netflix will almost certainly be a winner in the long run.
