The Bull Case for Netflix Stock

At one time, Netflix (NFLX) was among the tech industry’s most beloved growth stocks, but it has faced unusual headwinds in 2021.

While other companies have generated high levels of growth, Netflix share price has been largely static throughout the year and has even declined slightly. This had led to understandable concerns among investors that the company may be less attractive to hold in the months and years ahead.

The news, however, isn’t all bad for the streaming platform. The bull case for Netflix is still relatively strong and has kept many investors from selling their shares during these tumultuous times. Here’s what you need to know about both the bearish and bullish outlooks on Netflix.

Why Have Investors Been Concerned About Netflix?

The biggest concern for investors recently has been the loss of about 430,000 subscribers in the North American market during Q2.

Compared to explosive subscriber growth a year earlier, this pullback suggests to some investors that Netflix may have matured in the critical US and Canadian market. If true, this fact could set the stage for lower future growth. In its Q2 investor letter, the company blamed the pullback on volatility associated with the ongoing COVID-19 pandemic.

Growing competition in streaming also concerns those with a more bearish view of Netflix.

Once dominant in the sector, Netflix now has to contend with streaming services created by Amazon (AMZN), Disney (DIS) and other media giants to compete directly with it for subscribers’ dollars.

As these newer streaming services become more established, bearish investors believe they could reduce Netflix’s future growth or even begin to pare its market share.

Finally, some investors worry that the rapid growth in both revenues and subscribers seen last year could be nothing more than a temporary effect of the COVID-19 pandemic. As theaters closed due to pandemic-related lockdowns, consumers had very few live entertainment options to choose from. As the pandemic eases and consumers return to live venues, investors worry that the streaming market as a whole could become less attractive.

What’s the Bull Case for Netflix Right Now?

Despite what has inarguably been a rough start to 2021, there’s still a strong argument supporting a more bullish view on Netflix.

To begin with, the loss of subscribers so far this year comes after a year of extremely robust growth. In 2020, the company gained approximately 10 million subscribers worldwide.

These gains were largely the result of the COVID-19 pandemic, which forced many consumers to stay home and heightened demand for new entertainment options. Following such a year of rapid expansion, subscriber losses in 2021 have done little to affect Netflix’s strong market position.

Aside from the 2020 numbers, there’s also cause for optimism in overall numbers from the company’s international operations. While Netflix lost subscribers in the American and Canadian markets, it gained about 1.5 million customers globally, a majority of which were from the Latin American and Asian markets.

These numbers show that Netflix can still produce strong growth in emerging markets, even if its appeal in more developed economies has peaked.

The company’s projections also show higher growth levels to come in Q3. Netflix currently plans to add 3.5 million new members in the third quarter, more than doubling the Q2 additions. While these numbers are still lower than some investors would like to see out of the streaming giant, they do suggest that the slump in growth is temporary.

Subscriber counts are also only one component of potential future growth for Netflix. The company has recently discussed future plans to raise revenues, the most prominent of which is a move into the video game market. By adding video games to its portfolio, Netflix could tap into a global market worth more than $150 billion and generate new revenue from existing customers.

Alongside the move into video gaming, Netflix (NFLX) is also beginning to sell merchandise connected to some of its intellectual properties.

As the source of several popular original series, Netflix now has a stable of IPs that can generate revenue through product licensing and merchandise sales. One of the more practical upshots of this strategy is the ability to generate new sales from series that have ended.

Ongoing focus on improving services and creating more original content should also help Netflix going forward. In order to drive growth in Q3 and Q4, the company plans to spend about $17 billion on new content.

This content is set to include new seasons of already popular original series that should help to draw in more viewers. Many shows had been placed on hiatus due to the difficulties of filming during the pandemic, preventing Netflix from releasing content on its original schedule.

While the company is still backlogged on content creation, a heavy slate for the fall season of 2021 should help it return to something more like its normal programming schedule.

The final component of the current bull case for Netflix is the fact that the company continues to produce large profits which have continued to grow despite minor subscriber losses. In Q2, Netflix posted a $1.3 billion profit, nearly double what it realized in the same quarter last year.

Revenue also increased by about 19 percent, a target the company hopes to maintain going forward. Overall, these numbers suggest that the loss of subscribers in the North American market and a lack of acquisitions have had minimal impact on the streaming giant’s bottom line.

Which Case Is Stronger?

Taking everything into account, the bullish case for Netflix appears to be the stronger of the two. While there are certainly real concerns about how the end of the pandemic could affect growth in the short term, the company’s profits and prospects for global growth are significant causes for optimism.

Initial moves into video gaming and merchandise sales also show that Netflix is far from out of ideas for new sources of revenue. Overall, Netflix appears to be in a strong position

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.