Though Netflix (NASDAQ:NFLX) soared above the $305 level following its quarterly earnings report, the stock erased those gains. The uptrend on the stock is holding but concerns remain.
Netflix reported a 31% increase in revenue, to $5.2 billion. Operating income doubled to $1 billion. Operating margin improved to 18.7%, up from 12% last year. It did not exercise more spending discipline; it just happened to have benefited from the timing of lower content and marketing spend.
Total paid additions grew 12% to 6.8 million subscribers. This is a disappointing rate of growth because the stock relies on strong subscription growth to justify the ~50x forward earnings multiple. In North America, Apple+ TV and Disney Plus (DIS) will create significant competition for Netflix. It also limits how much Netflix may raise monthly rates.
Both Apple and Disney will charge next to nothing in monthly rates, at least in the eyes of the consumer. Both firms will probably lose hundreds of millions in the first year. This is a necessary cost to grow the user base. It also stops Netflix from raising fees for at least one to two years. Without cash flow growth, Netflix will have to buy content at lower costs and find ways to grow its library without incurring more debt.
Expect Netflix stock underperforming for the current quarter. Once the impact of Apple and Disney on subscription growth is clear, the stock will have a limited upside.
