Netflix (NASDAQ:NFLX) has been a stock that investors love to hate. Even when the company was posting beat after beat in its 2020 earnings reports, the stock almost like clockwork would fall. However as Netflix gets ready to post earnings for the fourth quarter, there seems to be a change in sentiment. After falling for most of the 30 days preceding this announcement, shares of Netflix are posting a small gain in early morning trading.
Netflix will report its fourth quarter 2020 earnings after the markets close on January 19. Analysts expect the company to achieve earnings per share of $1.38 on revenue of $6.6 billion. Both numbers would be significantly higher than the $1.30 per share and $5.4 billion in revenue the company posted in the same quarter for 2019.
But it’s not a bullish earnings report that is of interest to me. Playing the earnings report game for a stock like Netflix is a tricky proposition. Rather, I like Netflix stock because the streaming service has achieved stickiness in the streaming wars.
Old Habits Die Hard
A common narrative towards the end of 2020 was that Netflix would see an exodus of subscribers due to its loss of The Office, its most watched content. I’ll admit to tripping over that banana peel. I had good reason. I have three kids who I don’t think could go a week, or maybe even a day, without watching the antics of Michael Scott and Dwight Schrute.
So I was curious to see how they would react to Netflix when the ball dropped on 2021. As it turns out, they’ve stuck with Netflix. Now some of this is due to the fact that they can access it from my account (two of them are college students) but some of it is that the streaming service has become sticky and familiar. They’ve found additional programming that piques their interest.
Some analysts will point to Netflix’s use of AI to generate viewing suggestions and curate content. I see more often word-of-mouth via social media where people are asking people to make binge-worthy recommendations. And for those of you that think I’m dismissing the company’s technology, I’m not. I’m actually paying it a compliment because I believe the fact that the company remains “buzzworthy” is impressive.
The Streaming Wars Are Evolving
I live in an area where Comcast (NASDAQ:CMCSA) is the only game in town as far as home internet is concerned. And in December, Comcast gave me their Flex TV service for free along with a complementary year (I think) of its own streaming service, Peacock. This is where The Office is now housed.
So yes, my kids can still get their fix. But that’s not my point as it relates to NFLX stock. Comcast and Disney (NYSE:DIS) are two examples of companies that are generating impressive subscriber numbers (Well, Disney for sure we have to wait to see what Comcast reports). But the companies are generating those subscriber numbers without paid subscriptions.
Say what you will, but Netflix has moved away from free trials and is increasing the price of its subscriptions. But if consumers already have the service are they apt to cancel for a small price increase (I believe my subscription will increase by about $4).
The streaming wars are evolving. Analysts are becoming less impressed with quarter-over-quarter subscriber growth. What they’re looking for is the ability of these companies to generate recurring revenue, streaming as a service if you will. And Netflix looks to be a known quantity in that regard.
Analysts Suggest a Reversal in the Trend
Earlier I mentioned that Netflix had a tendency to go down after earnings. It still might after it reports on the 19th, but analysts are very bullish on the company. The consensus 12-month price target puts the stock at around $545. However recent analyst ratings are much more bullish on NFLX stock. That means it looks more likely that the stock could soar to around $600 per share.
And that may start with what comes out of the company’s earnings today. The bottom line for me is that Netflix is more than just a pandemic play at this point. It’s becoming a mainstream media force and should be looked at accordingly.
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Did you know the S&P 500 as we know it today does not look anything close to what it looked like 30 years ago? In 1987, IBM, Exxon, GE, Shell, AT&T, Merck, Du Pont, Philip Morris, Ford, and GM had the largest market caps on the S&P 500. ExxonMobil is the only company on that list to remain in the top 10 in 2017. Even 15 years ago, companies like Radio Shack, AOL, Yahoo, and Blockbuster were an important part of the S&P 500. Now, these companies no longer exist as public companies.
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