Shares of Netflix (NFLX 1.73%) are up 21% over the last month as investors started to see brighter prospects for the embattled streamer. While Netflix reported its second-consecutive decline in paid memberships, its second-quarter loss of 970,000 subscribers was better than management's anticipated loss of 2 million.
The worst seems to be over, as management guided for paid memberships to increase by 1 million in the third quarter. That should lead to a revenue increase of 12% on a constant-currency basis.
Some investors probably saw this coming. It wasn't unreasonable to expect that Netflix could beat its subscriber forecast, especially after interest in the latest episodes of Stranger Things caused Kate Bush's 1985 single Running Up That Hill to go viral, climbing to the top five of the Billboard Hot 100 list in June.
It's clear that Netflix can still create "water cooler conversation," as management likes to say. With the stock down 72% from its highs due to slowing subscriber growth, the ability to stir buzz with its releases is the most important factor that can help Netflix resume its long-term subscriber-growth trajectory.
What's more, Netflix released viewership data from Nielsen Holdings that begs the question: Did the market overreact to what could be a temporary subscriber dip?
The beginning of a comeback?
Netflix is still the king of streaming. During June, its share of U.S. TV viewing reached an all-time high of 7.7%, up from 6.6% in June 2021, according to Nielsen.
In terms of minutes viewed, it wasn't even close. Netflix generated over 1.3 trillion minutes of viewing time during June. Paramount Global's CBS network was second, with 753 billion minutes viewed. Even with Walt Disney's new Star Wars limited series Obi-Wan Kenobi, Disney+ was No. 6, with 245 billion minutes viewed.
Netflix has over 220 million paying subscribers, so it should lead other streaming services in viewing time. But that large subscriber base has turned into a key competitive advantage because more people watching Netflix creates a greater canvas of word-of-mouth marketing for the service.
Another positive working in Netflix's favor is improved profitability. Unlike years ago, when profit margin was razor thin, it now has the resources to invest whatever it needs to generate subscriber interest.
NFLX Operating Margin (TTM) data by YCharts.
Here's why Netflix stock is a buy
Netflix produces enough profit to self-finance its investments without issuing more debt, as it was doing in recent years. Through the first half of 2022, Netflix's operating profit margin improved to 22.8%, up from 21.6% in the same period of 2021.
Moreover, management said it's past the most cash-intensive part of spending on content, which had been chewing up the company's bottom line. This is welcome news, since it means that leadership doesn't believe it must keep spending more cash to resume subscriber growth. The company now expects substantial growth in free cash flow in 2023, with 2022 free cash flow expected to be approximately $1 billion.
The boost in cash flow comes as Netflix ramps up investment in mobile games and plans to launch its cheaper ad-supported subscription plan in early 2023. It's already tapped Microsoft as its advertising-technology partner.
With these opportunities and the momentum Netflix recovered with the latest installment of Stranger Things, the risk-to-reward ratio may be tilting in investors' favor right now. And at the stock's low price, buying Netflix today could be a smart move for long-term investors.
