Netflix (NFLX 1.02%) had a strong year on the stock market, with shares up by 35%. However, the streaming specialist recently encountered a bit of an issue. Elon Musk, the famous CEO of Tesla and the wealthiest person in the world, called for Netflix's subscribers to cancel their subscriptions over some controversy surrounding a character from an animated show on the platform, leading to a one-day, 5% decline in Netflix's stock.
Is this a bad sign for Netflix, or just a one-off event that won't have much of an effect on the company's long-term performance?
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Looking at some precedents
It's not the first time a famous person with a large following has made a comment about a company that tanked its share price. In fact, Musk has been involved in a similar incident before. On May 1, 2020, he claimed on a social media post that Tesla's stock price was too high, leading to a one-day 10% drop for the electric vehicle maker's stock. However, even with significant headwinds and volatility recently, Tesla outperformed the market since then.
There are cases in which a company performed terribly over five years (or so) after seeing its stock price drop significantly because of something a famous person said, but that was almost certainly because of the company's own shortcomings.
Kylie Jenner famously sent Snap stock prices down significantly on Feb. 21, 2018, after she publicly stated that she doesn't use Snapchat anymore. The company has significantly lagged the market since then, but only after its shares soared in the early days of the pandemic. In other words, the problem isn't Jenner's comments, but Snap's poor financial results.
These examples may not be identical to Netflix's recent debacle, but here's the critical point, which economist Benjamin Graham, father of value investing and mentor to Warren Buffett, said: "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
So, investors should look past the noise and cut through the short-term sentiment. Whether Netflix's shares remain attractive right now has little to do with Musk's comments and depends, instead, on the company's underlying business. Let's turn our attention to that.
Netflix stock is still a buy
Netflix is the world's leading streaming company. It has been a pioneer in this field and built a strong brand that grants it significant pricing power. Over time, Netflix increased its prices while continuing to grow its ecosystem of viewers, which speaks volumes about the company.
The company's financial results remain excellent. In the second quarter, its revenue increased by 15.9% year over year to $11.1 billion, while its earnings per share came in at $7.19, 47.3% higher than in the same period last year. Netflix's free cash flow was $2.3 billion, 86.9% higher than the prior-year quarter.
Netflix credited member growth for its strong Q2 results. The company's significant ecosystem of viewers -- which is deeper than that of any of its streaming competitors -- grants it another advantage. Thanks to the significant data on viewing habits it possesses, Netflix can create shows (or license ones) that cater to viewer preferences, leading to even more engagement, more data, and better content production decisions, a wonderful illustration of the network effect.
Netflix's vast ecosystem and the data at its disposal should also allow its relatively new ad business to be massively successful. A few years ago, the company introduced a low-price ad-supported tier to cater to more price-sensitive customers, one of several initiatives it launched to maintain its position amid growing competition. The company also cracked down on password sharing.
These efforts have been successful, and despite the increase in the number of streaming platforms, Netflix remains in an excellent position. Finally, the company still has plenty of white space to exploit.
Netflix estimated a more than $650 billion opportunity, which is severely underpenetrated. Thanks to its strong economic moat and excellent execution, the company should ride the streaming tailwind for years, delivering strong returns along the way. Regardless of Musk's recent comments, the stock remains attractive to long-term investors.
