This isn't the first time Netflix (NFLX +0.96%) has made its naysayers look silly.
Ever since the Qwikster debacle back in 2011, when Netflix intended to split its DVD and streaming businesses, the company has rebounded from setbacks time and again, and its stock has reached new all-time highs.
Now, Netflix seems ready to do it again. After plunging more than 70% from peak to trough in the aftermath of the pandemic, Netflix has recouped nearly all of its losses. And after its subscriber growth briefly turned negative in 2022, the company responded with a new set of strategies that are clearly paying off.
The company's first-quarter earnings report, which included a record operating margin, its fastest quarterly revenue growth since 2021, and much better subscriber growth than expected, shows why the stock looks like a screaming buy right now. Here are a few of the highlights.
Image source: Getty Images.
1. New initiatives are paying off
In early 2022, Netflix was in trouble. The pandemic boom had faded, and subscriber growth turned negative. There were concerns the company's growth days were over, especially after a wave of new competitors entered the streaming market.
Netflix adapted to those challenges. It launched an ad-supported tier to give budget-minded subscribers a cheaper option, and to give advertisers who were losing audiences on traditional pay-TV channels a way to tap into Netflix's massive subscriber base.
In the first quarter, Netflix said its ads membership grew 65% quarter over quarter, and over 40% of new subscribers are signing up for this tier.
Co-CEO Greg Peters also said on the earnings call that over the long term, the company aims for total monetization to be split evenly between the ad-supported and ad-free tiers, showing how transformative advertising could be for the business.
Additionally, paid sharing has been a smashing success, helping to drive a surge in new subscriptions and boost operating margins as the company monetizes millions of previous password sharers.
Those initiatives are key reasons why the company added 9.3 million subscribers last quarter and its operating margin expanded to 28.1%, a new record.
2. It's leaving the competition in the dust
Netflix stock plunged in 2022 largely because its performance took a dive, but investors were also spooked the company was finally facing real competition. Disney, Apple, Warner Bros Discovery, Comcast, and Paramount Global had all entered the streaming market, giving viewers plenty of choices.
However, two years later, Netflix is raking in record profits, and most of its peers are still losing money.
Netflix has a number of advantages over the competition, including its massive subscriber base -- now at 270 million -- which gives the company the scale to spend on a broad range of content in both English and foreign languages. That's helped it reach a large international audience, which also separates it from rivals.
Finally, as a pure-play streamer, the company isn't saddled with the innovator's dilemma of pivoting to streaming while the legacy media business declines. Netflix had a significant head start over the competition, and it only appears to be growing larger.
NASDAQ: NFLX
Key Data Points
3. The stock is still misunderstood
Netflix beat estimates on the top and bottom lines and offered solid guidance in the second quarter, but the stock is down 8% as of this writing.
The company said it would no longer report quarterly subscriber numbers starting next year, which may be a disappointment to Wall Street, though that decision is a reflection of the company's evolving business.
Netflix's competitive advantages now look as strong as they ever have, and earnings estimates are likely to be revised significantly higher following the first-quarter update.
The streaming leader still commands less than 10% of viewing time in every country it operates in, meaning there's a lot of opportunity for growth, especially as it can tap into the ad revenue stream. With tailwinds from advertising, improving operating margins as the business scales, and strong subscriber growth, Netflix looks well positioned to keep up its strong profit growth and push the stock higher from here.
