Two days ago, in our flagship investment research service Innovation Investor, we told subscribers to buy Netflix (NFLX) stock before its third-quarter earnings report. We thought the stock was grossly undervalued ahead of what we felt would be a very strong quarterly print for the streaming giant.
Thankfully, we did.
Last night, Netflix indeed reported excellent third-quarter numbers that beat on everything. Subscriber growth. Revenues. Operating margins. Earnings. Netflix beat on every key performance indicator and Netflix stock soared in response, popping as much as 15% after-hours.
Even after the huge post-earnings rally, we still think Netflix stock is a strong buy, mostly because our original bull thesis remains intact. Netflix stock is generationally undervalued due to slowing growth concerns. But those concerns will be resolved in 2023 by a new ad-tier launch and some meaningful account sharing monetization efforts. As slowing growth reaccelerates, Netflix stock will pop in a big way.
We remain bullish.
A Big Beat With Reaccelerating Growth
Netflix’s third-quarter earnings report was excellent.
On the heels of back-to-back disappointing quarters (wherein Netflix both missed expectations by a mile and lost subscribers), management set the bar very low for the Q3 report. It cleared that low bar by a wide margin.
The company was supposed to add about a million subscribers in the quarter. It added 2.4 million subs instead. Revenues came in nearly $100 million above expectations. Operating margins were 340 basis points above estimates. Earnings beat by about 70%.
Indeed, Netflix smashed the Q3 estimates. It also guided higher on Q4 subscriber growth.
The big story here is that Netflix is finally growing again. For the first time since 2012, Netflix lost subscribers in the first quarter of 2022. Then, it lost even more subscribers in the second quarter. Many investors were worried this was the start of a multi-quarter trend of subscriber losses for Netflix as customers churned and went to other streaming services like HBOMax, Apple TV+, Disney+, and more.
Instead, Netflix got back into growth mode this quarter (+2.4 million subs). And it is expected to grow even more next quarter (+4.5 million subs).
Netflix is back.
In response, the stock soared (which we saw coming). But this rally is far from over…
More Growth Acceleration on Deck for 2023
We believe Netflix’s growth trajectory will continue to accelerate into and beyond 2023 for three big reasons:
- The new ad-supported tier will be huge. Netflix is launching its first-ever ad-supported tier in early November. And multiple consumer surveys indicate robust interest in that service, especially among Netflix “quitters.” Last night, management also commented that advertiser demand for inventory on that service has been exceptional. We believe this new ad-supported tier will be met with both exceptional consumer demand and advertiser demand, adding even more growth firepower into the Netflix rebound narrative.
- Account sharing crackdown in 2023 will add significant revenues. Management said last night that it will introduce a new set of account-sharing monetization efforts next year. Given a huge portion of Netflix accounts are shared – and that Netflix is launching these tools at the same time it’s launching its ad-supported tier – we believe Netflix has a huge opportunity to increase average revenue per subscriber in 2023 by reducing shared account numbers without a significant uptick in churn. We believe folks who would consider quitting after being kicked out of a shared account will instead opt for the ad tier. This should add a ton of firepower to the company’s topline in 2023.
- An absence of new streaming service launches will reduce churn. Everyone got worried about Netflix subscriber churn in 2021/22, but those were unusual years. Every media company launched a new streaming service between 2019 and 2022. Calendar 2023 will have no new streaming launches. Nor will 2024 (as of yet). Therefore, while an influx of new options caused Netflix subscriber churn over the past two years, the absence of that influx should reduce churn over the next two years.
The bulk of evidence today suggests that the current reacceleration of the Netflix growth narrative will persist into 2023. As it does, we expect Netflix stock to rally even further.
Too Cheap to Ignore
The real reason to get bullish on Netflix stock at current levels – and the reason we bought the stock just two days ago – is the valuation.
Netflix stock is trading at 3.4X trailing sales. That is more than a full standard deviation below the stock’s 10-year average sales multiple of 6.8X. It’s about as cheap as the stock has been over the past 10 years.
With Netflix stock priced so inexpensively, even the slightest bit of good news could spark big rallies in shares.
Case in point: Yesterday’s earnings report. Sure, Netflix smashed Q3 numbers, and Q4 subscriber guidance was very strong. But Q4 revenues, margins, and earnings guidance all fell below expectations. That didn’t matter. Netflix stock popped 15% anyways.
This signifies that the company doesn’t need to be perfect for NFLX stock to trade at 3.6X trailing sales. Give investors a little bit of subscriber growth, and boom, the stock will soar.
We think more than a little bit of subscriber growth is coming in 2023. Therefore, Netflix stock will keep rallying into 2023 and beyond. That’s why we bought the stock two days ago.
The Final Word on Netflix Stock
We’re going on a holiday stock shopping spree, mostly because every fundamental, technical, and sentimental indicator we follow is telling us that the stock market is very close to a bottom – and that the start of a huge rally is just around the corner.
Netflix stock was our first buy in that shopping spree. But it’s not our last.
Just last night, we issued five new alerts on the best stocks to buy right now. We think each of them will follow in Netflix’s footsteps and soar in just a few days.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.