Streaming giant Netflix (NFLX 2.51%) recently reported its third-quarter financial results. While the company's overall performance was strong, many investors focused on the fact that it added 2.4 million new subscribers during the period. Netflix had lost payers in the past two quarters, so the return to growth, especially a number that came in higher than what management had predicted, naturally excited the market.
Furthermore, Netflix projects that it will add another 4.5 million new subscribers during Q4. That's excellent news for the company and its shareholders, but there are other things to be excited about with Netflix. Let's look at three reasons why Netflix's stock looks like a buy.
1. Revenue growth will accelerate
Netflix's year-over-year revenue growth has decreased pretty consistently in the past three years.
NFLX Revenue (Quarterly YoY Growth) data by YCharts.
On the one hand, that isn't too surprising. Plenty of new streaming platforms have appeared recently, and the company faces more competition than ever. Netflix has also faced other problems that have led to it recording less revenue than it otherwise would have. Chief among them is password sharing.
When people use the account of a friend or a family member with whom they aren't in the same household, Netflix loses money. Thankfully, the tech company's new initiatives should help deal with these issues and boost revenue-growth rates. The first is Netflix's lower-priced, ad-supported tier, which launched this month in 12 key markets.
At $6.99 per month, it could help it attract some price-sensitive customers, especially in the current challenging economic environment. In addition, it will also help Netflix generate some sales from ads. Then there is Netflix's solution for password sharing. The company will allow users to create sub-accounts for those with whom they share their passwords outside their households.
This will enable password borrowers to have personalized accounts, which the original account holders will have to pay for. Netflix will roll out this feature next year. The company will also let users transfer existing Netflix profiles to a new account so they can retain their unique movie lists and preferences. It's also worth noting that Netflix's reported top-line growth has been impacted by a strengthening U.S. dollar this year. In Q3, Netflix's revenue increased by about 6% year over year to $7.9 billion.
The company's top line jumped by 13% year over year in constant currency terms. The U.S. dollar may or may not remain strong, but Netflix's solutions to the other headwinds it faces should have a meaningful impact on its revenue growth. While it is unlikely to get back to its highest levels, it should at least improve compared to what we have seen this year.
2. Engagement will continue to improve, too
Streaming continues to gain ground on other forms of television, including cable. During the first half of the year, it overtook legacy TV in terms of reach and engagement in adults ages 18 to 49. This trend will continue. The data shows that older generations (baby boomers) are much more likely to watch cable than younger ones.
In my view, streaming will eventually make cable almost entirely obsolete, although that will still take some time. The advantages of streaming over cable are obvious. First, it tends to be cheaper. Second, customers can stream shows on multiple devices and on-demand without having to sit in front of a television set at a particular time to catch the latest episode of a series they enjoy.
The ongoing switch will benefit the entire streaming industry, including Netflix, which should be one of the biggest winners. The company has continued to increase its share of television viewing time, a metric in which it leads almost all of its competitors. In the U.S., it accounted for a 7.3% share of viewing time in September, up from 6.5% as of the same month of last year.
Netflix is an expert in producing shows that its customers enjoy. During Q3, the fourth season of its hit series Stranger Things generated a whopping 1.35 billion hours of viewing time in the 28 days following its release. Many of the company's other shows performed splendidly, too. The general cord-cutting trend, coupled with Netflix's highly successful content strategy, should allow it to continue to increase its engagement and gain more and more viewing time.
3. Netflix's stock is still relatively cheap
Although Netflix's shares jumped after it reported its Q3 results, the company is still down 57% over the past year. In terms of valuation, it isn't that far off from the lows it set earlier this year and it remains much more attractive than it was a year and a half ago.
NFLX PE Ratio (Forward) data by YCharts
That's even though the company is dealing with its most serious headwinds. Its long-term prospects -- in terms of completely replacing legacy television -- still look bright. I view Netflix's shares as reasonably priced at current levels, and investors focused on the long game should strongly consider initiating a position.
