Netflix (NFLX -0.83%) stock surged more than 10% after finally returning to subscriber growth following two consecutive quarters of decline.
Wall Street analysts now see Netflix as a sustainable subscriber growth story again, but those who regularly watch content on the service could have seen this quarter coming from a mile away. Here's why.
Don't underestimate this CEO
Netflix founder and co-CEO Reed Hastings has earned investors' trust. He pioneered DVD-by-mail and streaming video before anyone knew they needed it. He's made mistakes (like Qwikster in 2011) and he's been quick to correct those mistakes.
That didn't stop the knives from coming out in April, when Netflix reported its first subscriber decline in years. Cue the analyst downgrades. One analyst after another issued a negative take on Netflix's future, given the heightened competition from major media companies that had launched their own streaming platforms.
With Netflix stock down nearly 70% after the first-quarter earnings report, one analyst got it right. In May, JPMorgan analyst Doug Anmuth reminded investors that Netflix is a highly profitable business and had been through tough times before, such as the fight with Blockbuster in 2008, among others."We'd never count them out," Anmuth stated in a note to clients.
Indeed, a bad quarter from Netflix didn't change the fact that the future of entertainment is streaming. It's unrealistic that the leader with the most content and subscribers, and the only service that is profitable, would never grow again.
The hits keep coming
The third-quarter net subscriber additions of 2.41 million were above management's guidance for a flat 1 million. This blew Wall Street away, but any investor who watches content on the service regularly would have had a front row seat to what was cooking behind the scenes.
There were several major releases in recent months that made it clear Netflix still had the content to draw an audience. In the first four weeks after launch on May 27, Stranger Things season 4 generated 1.3 billion hours viewed -- the most watched season of English-language TV in Netflix's history.
Granted, it was just one release, and while Netflix reported another subscriber loss for the second quarter, the buzz for Stranger Things on social media was a sign that this business was capable of performing better.
In the third quarter, Netflix turned it up a notch. Monster: The Jeffrey Dahmer Story achieved 824 million hours viewed in the first month; it's now the No. 2 most watched season of English-language TV in Netflix's history.
The October release of The Watcher has already garnered 125 million hours viewed in the first week, putting it on pace to potentially crack Netflix's all-time top 10 list for English-language TV.
Clearly, Netflix can still stir conversation at the water cooler, and management is starting to invest the company's more than $5 billion of operating profit into big-budget blockbusters. Red Notice (2021) and The Gray Man (2022), which achieved 254 million hours viewed in the last quarter, are recent examples of how Netflix can delight subscribers with theatrical-quality films.
Down 54% this year, the stock could outperform from here. Netflix has demonstrated it still has the content chops to be a good, long-term investment. It's an even better buy now because the stock trades at a much lower price-to-earnings ratio than it did at the start of the year, and it's still the only streaming service that has reported a profit.