Why Recent Weakness In Netflix Stock Isn’t Worth Stressing Over
After a red-hot start to the year, shares of Netflix (NASDAQ:NFLX) have been under pressure over the past few days. There are several negative catalysts behind this recent weakness in Netflix stock. A senior executive, who had been with the company for seven years, left. The competition buffed out its content portfolio. There was a Wall Street downgrade. Broader financial markets also dropped.
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But, none of this really matters in the big picture.
In that big picture, all that really matters in the NFLX growth narrative is content, and NFLX has already won the content game.
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As such, Netflix stock is a long-term winner that will only head higher in a multi-year window.
To be sure, long-term winners often experience bouts of tremendous volatility. NFLX stock is no exception, and history is proof of this. Over the past five years, the stock has undergone five 20%-plus drops from all-time highs. That’s about one big correction per year.
But, history is also proof that these drops are largely meaningless in the big picture. NFLX stock rebounded sharply from each one of those drops, and it has ultimately gained nearly 450% over the past five years.
The next five years will likely be more of the same. Thanks to Netflix’s massive and unchallenged content advantage over peers, Netflix stock is due for big gains over the next five years as the global streaming market grows by leaps and bounds, and Netflix continues to win the lion’s share of those new customers. That path higher won’t be smooth. There will continue to be big drops. But, much like the big drops over the past five years, the big drops over the next five years will be nothing more than noise and golden buying opportunities.
Consequently, investors shouldn’t stress recent weakness in Netflix stock. This stock remains on a long-term winning path, and it will only head far higher in a multi-year window.
Recent Headwinds Aren’t a Big Deal
The recent headwinds that have hit Netflix stock aren’t a big deal.
Broader financial market turbulence is a result of multiple factors, none of which will last very long, so stocks will bounce back. The Chief Marketing Officer departure is a C-suite shakeup, but not of the extremely high relevance kind (he isn’t on quarterly conference calls). Disney (NYSE:DIS) including the entire Disney content library in Disney+ is noteworthy, but not a back-breaker for NFLX, since originals are the true attraction of Netflix. And, the Buckingham downgrade is also noteworthy, but downgrades and upgrades happen all the time on Wall Street, so again, it’s not a huge deal.
Overall, the headwinds which have weighed on Netflix stock over the past several days aren’t needle movers in the big picture.
Follow The Content
When it comes to NFLX stock, investors should ignore ephemeral headwinds and tailwinds, and instead follow the content. I’ve said this for a long time, and continue to say it today, since content is the single most important driver of long-term value for Netflix.
The logic here is pretty simple. The global OTT video market is growing by leaps and bounds as consumers pivot from linear to internet TV. Thus, market growth isn’t the question here. The question is Netflix’s competitive positioning in that market. Original content improves that competitive positioning and thereby bolsters long-term value.
Breaking it down, the better Netflix’s original content, the bigger its moat against competitors, the stronger its competitive positioning, and the more subscribers it will naturally attract. Also, the better Netflix’s original content, the more exclusive value the platform adds, and the more consumers are willing to pay for that exclusive value.
Thus, at Netflix, strong original content paves the path for sub growth and price hikes. Sub growth and price hikes lead to revenue growth and margin expansion, which leads to profit growth. Long-term value is ultimately a factor of profit growth.
Overall, original content is the single most important driver of long-term value for NFLX. As such, investors should follow the content, not other near-term headlines.
The Content Flow Is Better Than Ever
As I’ve said before, Netflix has won the content game, thanks to its unchallenged reach and data advantages. In short, Netflix has way more subs than anyone else, so it can justify higher original content spend more easily and with much more immediate ROI than peers. It also has way more data on consumer watching preferences than anyone else, so it can take an unprecedented data-driven approach to content production that no other can match at scale.
Also, Netflix came to being when there was no other streaming video platform. Now, Netflix exists. Thus, follow-up competitors like Disney+ will have a very hard time trying to get to Netflix’s size, meaning that Netflix has, for all intents and purposes, already won the content game for the foreseeable future.
Don’t believe me? Just look at NFLX’s recent original content flow. Early 2019 releases include both movies and shows like The Umbrella Academy, Losers, After Life, The Boy Who Harnessed The Wind and Russian Doll. All of those early 2019 releases were loved by Netflix subs, and received exceptionally high marks on crowdsourced film and show rating platforms like IMDb.
Thus, the Netflix original content flow today remains very good, and it’s actually better than ever (I’ve been following Netflix original scores for a long time, and the late 2018 / early 2019 line-up is scoring better than previous line-ups). It will only get better, thanks to Netflix’s unmatched reach and data advantages.
Bottom Line on Netflix Stock
NFLX has long-term advantages when it comes to producing original content, and that’s a big deal since producing strong original content is the single most important thing in unlocking long-term value for Netflix stock. Consequently, regardless of near-term noise (and there will be a ton), Netflix stock remains on a long-term winning trajectory.
As of this writing, Luke Lango was long NFLX.
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