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July 17 – Stock mentions: NFLX
Michael Kramer and the clients of Mott Capital own NFLX
Sorry for the delay, but I’ll be honest this 24 hours news cycle is wearing me down. Netflix results were very disappointing on the surface. The company’s paid net additions of 2.7 million, was well below the company’s forecast of 5 million. The stock is trading lower on by around $45 at $320, mostly because Algo’s don’t read materials and only respond to headline.
If this turns into a Disney ESPN, Tesla Model 3 saga I won’t make it. I really won’t. The light member addition does not tell the whole story in my view. Let’s face facts, a headline about how Netflix is Tanking gets better pageviews then A Deep Dive Into Netflix results article, so which narrative is better for revenue?
The funny thing is that had this been 3 quarters ago, we’d be talking about the 6 million net additions the company had this quarter. But because the company had everyone refocus its attention on total paid additions, instead of total gross additions the story is different. Such is life.
I have yet to see anyone mention that the number of free trial users increased by 6 million in the quarter, with roughly 4.5 million added internationally, and 1.5 million domestically. My hunch, based the data I track, is that the company had a surge of subscribers in June, and due to the 30 day free trial period didn’t convert over to paid members in time.
It is the only thing that logically makes sense, and why the company would still feel comfortable guiding to 7 million net addition in the third quarter. The one thing I know about Netflix is that it is a good management team, and Reed Hastings is an outstanding CEO. They do not play games.
The second quarter has never been good anyway. The chart below shows that is pretty clear.
Meanwhile, when looking deeper, we can also see that the number of free trial signs up was consistent with past figures. Additionally, according to past 10-Q’s Free trial results are the numbers that at the end of the period.
So while the topline subscriber number is disappointing, I do not believe this is the diaster that all the headlines are suggesting. If the number of free trials was down significantly, then yes, I would be more concerned.
I can’t image people are holding off signing up to Netflix and saving $15 a month because they are waiting for Disney’s $6 a month product to launch 5 months from now when they spend $6 per latte from Starbucks or $1000 for an iPhone. I also doubt people are anxiously waiting for Friends to show up on some Comcast product. I don’t see it that way.
Not only that, it isn’t like Friends is even exclusive to Netflix, you can watch it for free if you have a cable subscription on websites such as TBS and Nickelodeon. You can watch it anywhere in the world, where is a complete list. Do I think people sign up for Netflix to watch Friend or any show that has been in syndication for the past two decades, and when its pulled from Netflix there will be a mass exodus from the Platform? No, I do not. I sure won’t. I don’t watch Friends now.
Will the stock be down tomorrow, sure, why not. Do I think it will stay down for long? I don’t think it will stay down for long. Eventually, investors will put the pieces together just like I did.
It’s just like that recession we are STILL waiting for. I’m waiting!
That is all.
-Mike
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