Buying Netflix shares from Australia? A golden growth opportunity

Nick Sundich Nick Sundich, April 23, 2024

Buying Netflix shares from Australia may seem like a no brainer. It has recorded exponential growth since its famous pivot from DVD rental to streaming, now boasting over 250 million  memberships around the world and a content library other streaming platforms can only dream of. Yes, there were concerns about it losing revenue due to password sharing, but these look like they’re being addressed. Consensus estimates suggest another decade of exponential growth ahead.

 

Netflix is facing concerns from investors

The company reported an increase in Q1 profits to $2.3 bn ($3.58 bn AUD) as a result of a crackdown on password sharing, which it claims granted it an additional 9.3 million customers to its steadily growing subscriber base that now totals around 270 million. As a consequence, its NASDAQ-listed share price rose by over 30% since the beginning of 2024, growing close to its all-time high of $690 USD in October 2021.

That was until April 18 when it sent a letter to shareholders announcing its intention to cease the disclosure of its subscriber base and membership figures from the start of 2025 and with it the release of average revenue per member (ARM) numbers. In doing so, the company’s management has tried to assure investors that they are simply trying to steer the boat in a new direction by placing a greater emphasis on viewer engagement as a measure of growth and value rather than raw membership numbers.

 

Ads or no ads?

“We’re focussed on revenue and operating margin as our primary financial metrics — and engagement (i.e., time spent) as our best proxy for customer satisfaction”, the letter reads. “Success in streaming starts with engagement. When people watch more, they stick around for longer (retention), recommend Netflix more often (acquisition) and place a higher value on our service.” In our view, it’s hard to gauge the validity of these comments.

Viewer engagement is primarily relevant for advertisers who are interested in the frequency of the exposure their commercials will get on the platform. Although it comprises over 23 million active users, Netflix’s ad-supported tier is still a relatively primitive arm that accounts for a very small part of the company’s overall business catering to approximately 260 million members.

We’re not saying the advertising segment won’t grow, it likely will. We’re simply saying it’s far too early for engagement rates to replace subscription figures as the primary barometer of the value of Netflix’s services.

 

The decline

The markets seem to agree with us. Since the letter’s dissemination only four days ago, Netflix’s stock has tumbled 12.5%, with analysts suspecting the company may be concealing the true intentions behind its decision to stop disclosing membership figures and that it may presage a looming slowdown in subscriber growth. However, this isn’t something unseen in the arcane realm of tech stocks.

In 2018, public investors in Apple ran into a similar conundrum after the company announced it would stop publicising unit sales of its most popular products including iPhones, Macs and iPads. Its CFO Luca Maestri justified the decision based on similar reasoning to that which Netflix is citing, claiming “a unit of sale is less relevant for us today than it was in the past, given the breadth of our portfolio and the wider sales price dispersion within any given product line.”

 

Investors like transparency

Similar to Netflix’s recent bearish market slip, markets alike weren’t too pleased with Apple’s call and proceeded to punish its stock. Immediately after Maestri made the announcement, Apple’s share price was down 7% in aftermarket trading.

It then plunged a further 22% downward to US$38.07 before it began to resurge. However, it turned out that the short-lived investor panic wasn’t borne out in reality and Apple’s stock has since grown fourfold in the more than 5 years since then.

 

Netflix (NDQ:NFLX) share price chart, log scale (Source: TradingView)

 

So is buying Netflix shares from Australia a smart move?

Good question. There are two potential routes to take on this one. The consensus investor will warn you of Netflix’s various motives in concealing subscriber figures, particularly that it may signal a dip in those figures. The contrarian will tell you to keep your head up high in the face of a transient bearish outlook on an otherwise fantastic and ever-growing tech company and streaming service, and we would lean towards the latter considering everything we’ve noted here. Namely, that short-term dips are not unheard of amidst tech giants like Netflix, and because the company still has growth ahead of it.

The mean share price amongst the 42 analysts covering the stock is US$637.89 per share, a 15% premium to the current share price as at April 22, 2024 (pre-market US time). We think the company is worth US$711.23 per share, a 28% premium, using a DCF model with a 10% discount rate and ironically using estimates slightly more conservative than consensus estimates.

 

Very decent growth

These estimates call for 14% revenue growth and 50% EPS (Earnings Per Share) growth in CY24, translating to $38.6bn in revenue and a $8.2bn profit respectively. CY25 estimates call for another 12% revenue growth and 20% EPS growth translating to US$43.2bn in revenue and a $9.7bn profit, while CY26 estimates call for 10% revenue growth and 20% EPS growth, translating to $47.7bn in revenue and an $11.6bn profit.

But where will this come from? It will come from its network advantage where more subscribers will lead to more premium content not available elsewhere, which will lead to more subscribers…and so on. Even though it is only not available in China and Russia, it remains under penetrated in certain markets, particularly non-English speaking markets and is looking to grow with non-English originals. Examples of such markets include Mexico, Brazil and France.

 

Conclusion

There’s always the risk of ‘catching a falling knife’ when buying a stock with a temporary dip. But of course, there is lower risk when you’re buying an established company like Netflix. It is not as thought it has announced a dip in subscriber or revenue numbers or average revenue per subscriber. Rather it is transparency concerns. These may be legitimate, although the worry that numbers are dropping are nothing more than a concern right now, and there’s little concrete evidence to suggest to the contrary.

We think there is a golden opportunity to buy Netflix shares at a discounted price that will not last for long.

 

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