4 Reasons Why Netflix's 13% Plunge Is A Buying Opportunity

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Investing in Simple Rules:

1. Buy Low, Sell High: It's Best to D & # 39; Buy a stock when it is low and sell when it is If a company exceeds the quarterly expectations of investors in terms of business turnover, profits and customer growth and increases its expectations, the company will not be able to sell it. action will increase, otherwise it will plunge

Unfortunately, the two rules are virtually useless for investors, the problem is that it is impossible to know if a falling stock price is a predictor of more declines or if stocks later reach new heights. Do not predict whether a business will beat and restart.

n look at past performance and try to use that to predict what will happen next.

This comes to my mind when considering Netflix – which on July 16 reported a new number of subscribers who disappointed investors and pulled down its stock by about 13% after July 16th. There are four reasons why I think this is a buying opportunity. (I have no financial interest in the titles mentioned in this post.)

Netflix is ​​below expectations of the second quarter of 2018 with respect to the number of subscribers in the United States and lowered its forecasts for the third quarter. According to the Wall Street Journal in the fourth quarter, Netflix's 4.49 million international customers were 11% lower than its predictions, while Netflix's 670,000 US subscribers were 44% lower than expected. . In addition, Netflix expects to add 5 million new users in the third quarter, 21% lower than badysts' expectations.

Netflix exceeded expectations in terms of earnings and did not realize a turnover. Its second quarter earnings of 85 cents per share were 6 cents higher than the badysts polled by Thomson Reuters – and 467% higher than the year before – while revenues of $ 3.91 billion – up 40% compared to the previous year – million less than predicted by badysts

Why buy now?

1. Netflix has recovered well from previous failures

Almost two years ago, I wrote this: "Netflix has not estimated its number of new subscribers for the second quarter and its stock plunged nearly 14% after July 18. "

Missing a quarter is not new – according to the Journal, Netflix has missed forecasts in three of the last ten quarters.

Over the last two years, Netflix shares have recovered from this absence of July 306

2. Netflix is ​​targeting a large market

Netflix – with 130 million dollars. global subscribers – now serving nearly 200 countries

But the global market for its services is about five times that. According to Morgan Stanley, the total addressable market for video streaming is 660 million. Morgan Stanley believes that Netflix will capture 300 million subscribers by 2028.

If Morgan Stanley is right, Netflix's market share will rise from 20% in the first quarter of 2018 to 33% of the global market in a decade. now.

3. Netflix Invests in the Future

Thanks to the fact that CEO Reed Hastings is what I called in my book, Startup Cities ] a marathoner – a CEO who turns an idea into a big public company; he's not afraid to invest in growth.

Netflix spends more than the competition for content. Specifically, Netflix will spend $ 12 billion in cash on content – $ 8 billion on content spending and $ 4 billion more on upcoming shows and movies – "dwarf rivals like Amazon.com Inc. and HBO ", according to The Journal.

Netflix became global a few years ago and invests heavily in India. Netflix reported on July 16 that he had a strong debut for two Indian originals: a movie, "Lust Stories," and a series, "Sacred Games," according to his shareholder letter.

4. The CEO of Netflix is ​​a master of adaptation

In my book Disciplined Growth Strategies I wrote that abilities can be a source of growth – just like culture. Netflix summarizes both.

For example, Hastings decided at the time of the introduction of the iPhone that he should switch from DVD to email to online streaming. After all, he thought, more people would start watching videos on smartphones than on their TV screens.

To participate, Hastings has developed new features at Netflix. He put the emphasis on buying DVD wholesale and started investing in the production of original content; Instead of badociating with the USPS to deliver DVDs, it has entered into broadband distribution agreements with companies like Comcast; and instead of sticking mainly to the United States, he decided that Netflix should become global.

Everything paid off – despite some occasional stumbles.

One of the keys to Netflix's growth has been its culture. idea of ​​a family business with the badogy of the sports team. Indeed, the net benefit of Netflix – paying the maximum for the best people who can work well with others and do the right thing without supervision – has led to the departure of Patty McCord, the director of human resources who articulated this culture [19659028]. possible that anyone who is responsible for the forecasting system at Netflix may soon be unemployed.

And its negative cash flow is certainly a concern – that Netflix has been able to cover by borrowing more. Its negative free cash flow of $ 559 million in the second quarter was 8.8% lower than in the previous year. He forecasts negative free cash flow of $ 3 billion to $ 4 billion for 2018. And he added $ 1.9 billion to his debt in the second quarter for a total of $ 8.4 billion, according to the company.

But as long as Hastings is CEO of Netflix, his missed earnings are a gift to investors. [>[19459032] NEW DELHI, INDIA – 2018/07/03: Bollywood Celebrities Nawazuddin Siddique, Radhika Apte, Anurag Kashyap at the screening of Indias premier Netflix Sacred Original Series of games. (Photo by Jyoti Kapoor / Pacific Press / LightRocket via Getty Images)