Streaming video specialist Netflix (NFLX 1.63%) reported its first-quarter earnings on April 18, and the market wasn't impressed, as evidenced by the stock's decline following the update. Among other things, investors were not happy that Netflix added just 1.75 million net new subscribers in the period, that its revenue grew by only 3.7% year over year to $8.2 billion, and that its bottom-line figure dropped 18% to $1.3 billion.
Those headline results certainly were not stellar, but a deeper look at the report reveals a trio of notable bright spots that constitute solid reasons to consider investing in the stock now.
1. Free cash flow is on an upward path
Investors will be familiar with the expression "cash is king." Corporations with enough cash coming in have more flexibility to invest in potentially lucrative growth avenues, and don't have to worry about finding the money to pay down their debt, among other things.
For investors looking to get a read on how a company is doing on that score, the free cash flow (FCF) metric is especially useful since it isn't impacted by non-cash items. Free cash flow is like the money you have left over after paying for everything you need to run your business. If you have a lot of free cash flow, it means you have extra money to invest in growing your business. That's why investors like to look at a company's free cash flow to see if it has the spare cash it needs to grow and be successful.
In recent years, Netflix's management has been working hard to improve the company's FCF. After delivering negative FCF in 2021, it returned to the green in 2022. And in the first quarter of 2023, Netflix's FCF came in at $2.1 billion, compared to just $802 million in the prior-year period.
In the Q1 letter to shareholders, management reiterated its focus on improving this metric, setting a goal of at least $3.5 billion in FCF this year, up from its previous estimate of $3 billion. The company's growing FCF is a sign of an increasingly strong and healthy business, which is, of course, great news for shareholders.
2. There's plenty of white space left in streaming
One of the great things about Netflix is that, despite appearances, there is plenty of room to grow for the company. Streaming services may already feel ubiquitous, but Netflix's ultimate goal is to replace linear television. That hasn't happened yet, even in those markets that it has penetrated most thoroughly.
Consider the U.K., where streaming accounted for 35% of television viewing time in March, and where Netflix was responsible for 9%. In the U.S., streaming's share of viewing time was 34% last month, and Netflix accounted for just 7% of the total. In most other markets worldwide, streaming isn't nearly as penetrated. For instance, in March, it accounted for just 14% and 15% of television viewing time in Brazil and Mexico, respectively.
Even in relatively mature markets like the U.S. and the U.K., streaming services will continue to make headway, never mind in less-penetrated regions. Further, the only company that challenges Netflix in the industry is YouTube, and in terms of their business models, that isn't exactly an apples-to-apples comparison since the latter offers videos created by independent third parties. Putting the shorter-form YouTube platform aside, Netflix is the runaway leader in streaming.
The company will benefit for several more years as the medium it helped pioneer becomes the default choice for viewers -- around the world.
3. Netflix is adapting to the new environment
Netflix's excellent name recognition isn't the only reason it can keep winning in streaming over the long run. While it faces far more competition in its niche than it did 10 years ago, it is adapting to the new normal and finding ways to boost revenue. That's what it did in November by introducing a lower-priced ad-supported subscription plan -- something that it had long said it wouldn't do -- in 12 of its most important markets.
In 2023's first quarter, Netflix reduced subscription prices in 116 countries, a move that will maximize revenue over the long run, according to management. Netflix is also working on a rollout of its solution to password sharing with paid sharing accounts; it tested paid sharing in four smaller markets in Q1, and will roll it out in the U.S. and many other nations in Q2. This is a critical step. Password-sharing had become a pervasive problem for Netflix, costing it a meaningful amount of money.
Netflix has long been versatile as it pertains to producing shows and movies tailored to different nations' and regions' preferences. That, combined with the tweaks it is making to its business, should lead to stronger results.
Patience will pay off
Netflix is a more mature company than it was a decade ago. Its revenue and subscriber growth have slowed considerably. It also has more competition. All of these factors have scared off many investors. But those who are patient and stick with the stock should still be rewarded.
Netflix's market opportunity in the streaming industry remains immense, it has implemented various changes that should improve financial results, and its FCF is increasingly healthy. That's why Netflix's stock is still a buy, even after its stellar run of market-beating performances.
