Streaming giant Netflix (NFLX -3.92%) had a lot to prove with its second-quarter earnings report. Investors had abandoned the tech giant in droves due to its recent lackluster subscriber growth numbers. Netflix is also facing plenty of competition in the streaming industry, not to mention the password-sharing problem it continues to deal with -- an issue that is causing the company to leave plenty of money on the table.
Despite all these headwinds, Netflix managed to record decent second-quarter results. More importantly, there are still good reasons to invest in this tech giant.
Better-than-expected subscriber losses
All eyes were on Netflix's subscriber count coming into its quarterly update. The company did not disappoint in that department, at least compared to its predictions. Management expected to lose 2 million subscribers during the second quarter, but the company only lost 0.97 million. Of course, year-over-year comparisons still aren't kind to Netflix. During the second quarter of 2021, Netflix added 1.54 million subscribers.
Still, Netflix and its shareholders will take the better-than-expected losses. Despite losing customers, Netflix continues to grow its top line. In the second quarter, the company's revenue increased by 8.6% year-over-year to roughly $8 billion, driven partly by an increase in average revenue per membership. Net income jumped by 6.5% year-over-year to $1.4 billion.
Content is king
Some might shrug at Netflix's latest financial results. After all, the company is still facing stiff competition in the streaming industry, losing subscribers, and quarterly revenue growth rates are down. The company's operating margins are down too -- although that is partly related to the fact that the U.S. dollar has been appreciating compared to other currencies recently, including the euro.
Still, whether or not it is a result of factors within its control, Netflix faces serious headwinds. But there are also reasons to be optimistic, especially as Netflix's bread-and-butter strategy continues to be successful. During the second quarter, Netflix racked up billions of hours of views. The company's best-performing show was season four of Stranger Things, which managed to amass 1.3 billion hours viewed in the first four weeks after its release by itself.
Content is arguably Netflix's superpower. The company does not rely on luck to know what kind of shows to produce -- Netflix has collected (and continues to collect) data on viewer habits. This data helps the company steer its content production in the right direction, which keeps viewers glued to their screens. Increased engagement often has a snowball effect. Viewing one show leads to customers looking for similar titles, and so on.
That's how Netflix plans on increasing its share of viewing time. In the U.S., Netflix led all broadcasters and streamers in this category during the second quarter, with 1.33 trillion minutes of viewing time. There was no competitor close to Netflix -- and the next in line had 753 billion minutes under its belt. Netflix's share of U.S. viewing time came in at an all-time high of 7.7% in June, compared to the 6.6% it had as of June 2021.
True, Netflix still has to deal with several issues, including its password-sharing woes, which are taking a big chunk out of its revenue potential. But the good news is that the company plans to return to subscriber growth during the third quarter. Netflix predicted it would record roughly 1 million net paid additions in Q3. Pandemic-related dynamics aside, Netflix still has room to grow in the global market.
With its content production strategy still working, expect the company to make tweaks to deal with issues such as password sharing and find ways to get increasingly more out of its massive user base. Meanwhile, the stock is still down by 64% year-to-date, and shares remain relatively cheap. At these levels, Netflix still looks like a buy, although investors may require some patience before the company can fully get back on its feet.
