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Are Netflix Bears Looking at the Wrong Numbers?

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netflix stock

Important points

  • Netflix management is not striving for maximum subscriber growth at all costs.

  • The company balances customer growth with many other important considerations, including: B. price and long-term customer loyalty.

  • It’s about long-term success, not about measuring each quarter with a single metric.

skeptics of Netflix (NYSE:PL) had its big day with its fourth quarter report in January. Subscriber growth was just short of management forecasts, and official projections for user numbers over the coming quarter were little short of disappointing. Stocks plunged 21% the next day as bears finally found some hard data to chew on.

However, Netflix concern makers are targeting the wrong data point. let me explain

The slowdown in the number of subscribers triggers a massive sale

The management team said the same thing on its fourth-quarter earnings call. Co-CEO Reed Hastings noted that the quarter was good due to higher viewer retention and lower subscriber churn. Chief Financial Officer Spencer Neumann noted that even in this doldrums, Netflix is ​​adding new customers, just at a slower pace than usual. In general, Netflix executives tried to steer the discussion in a more productive direction, but the efforts were in vain. .

Investors shrugged off the argument, sending Netflix’s stock price lower.

How Netflix sees your finances

A few weeks later, Netflix had another chance to point investors to the right metrics. In his speech at Morgan Stanley’s Technology, Media and Telecommunications Conference last week, Neumann succinctly described how Netflix assesses his business:

I think there is too much focus on the number of subscribers.

We focus on building a great business. We are focused on increasing our sales, profits and cash flow. It’s not just about membership numbers, it’s also about increasing engagement and of course adding value to our members by aligning pricing with that value.

So for us, it’s a combination of those things, not a year-over-year or quarter-over-quarter count of members. And we strongly believe that we will continue to deliver double-digit sales growth and, as we mentioned, we will continue to increase our profit margins. And not just on the way to cash flow break-even, but also with growing positive free cash flow.

Netflix is ​​an exciting brand

In other words, it would be foolish to focus solely on membership growth.

To that end, the best way to serve Netflix is ​​to cut prices and license a lot of content from other producers cheaply. That approach would attract millions of price-sensitive customers, but those subscribers would have little reason to remain loyal to Netflix’s service. Another bargain-priced streaming service could easily steal those customers.

Netflix spends billions of dollars producing award-winning shows and movies, and then charges a premium for the chance to watch that exclusive content. As the company explains in the publicly available long-term plan, Netflix wants to be a premium name that people love and are willing to pay more for:

“Netflix is ​​a brand that focuses on passion, not a brand that does everything: starbucksnot 7-Eleven; south westno United; HBO, not Dish.”

There is a constant tug-of-war between subscriber growth and monetization efforts. Right now, Netflix is ​​more focused on growing its bottom line than optimizing subscriber count. Add uncertainty about the ongoing pandemic and geopolitical tensions and there may be a brief period of limited subscriber growth.

But long-term growth is still huge. Walking the fine line between growth and profit, Netflix aims to generate significant cash returns and invest the majority of its profits in a strong business model and long-term content portfolio. Therefore, it would be a big mistake to focus on one or two quarters of moderate subscriber growth.

At 51% off from October’s all-time high, Netflix is ​​a must-buy today.

The article Are Netflix Bears Watching the Wrong Numbers? first appeared in The Motley Fool Germany.

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This article represents the author’s opinion, which may differ from the “official” recommendation position of a premium Motley Fool advisory service. Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

This article was written by Anders Bylund and was published on Fool.com on 03/13/2022. It has been translated so that our German readers can join the discussion. owns Netflix. The Motley Fool owns stock and recommends Netflix and Starbucks. The Motley Fool recommends Southwest Airlines and recommends the following options: $100 April 2022 Short Calls at Starbucks.

Motley Fool Germany 2022

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