Netflix (NASDAQ:NFLX) stock has multiple, important, positive catalysts. Specifically, the company has shown that it can continue to deliver hit shows, while a key rival, Disney (NYSE:DIS), is stumbling.
Meanwhile, Netflix’s subscriber growth is accelerating, while its new video game business is likely to meaningfully improve its financial results down the road.
Given all of these points, I remain bullish on the longer-term outlo0k of NFLX stock.
Strong Shows and a Less Euphoric View of Disney+
Netflix has shown recently that it can continue to both produce and buy hit shows. Of course, at the top of the list is Squid Game from South Korea, which has already become extremely popular in the U.S.
Also a strong purchase by Netflix was The Baby-Sitters Club, which drew a 100% grade from critics and a 90% rating from consumers, according to Rotten Tomatoes. Another very well-received series bought by Netflix recently is the British comedy Feel Good about a comedian who’s also an addict. It received a 100% average rating by critics and a 92% mean grade from viewers, Rotten Tomatoes reported.
On the original side, Maid, about a single mother who becomes a house cleaner is rated as the 37th best show on Netflix, while Animal, a docuseries, is rated as the third-most popular show on Netflix, according to HuffPost.
In the third quarter, Disney+, seen as a key rival of Netflix, added a net total of just 2 million subscribers, down from 12 million in Q2. CNBC blamed the downturn on the easing of the pandemic.
That may have played a role. But I think there’s a good chance that saturation of the channels two key audiences – children in developed countries and India in general – may have also been instrumental.
Since Disney reported its Q3 results, DIS stock has fallen over 10%, and Wall Street’s love affair with the name seems to have worn off. That has likely caused many investors to turn to NFLX stock as an alternative to slumping Disney.
Relatively Strong Results for Netflix
Unlike Disney, Netflix’s subscriber growth accelerated last quarter. Specifically, it added a net total of 4.4 million versus Q2, versus just 1 million in the previous quarter. What’s more, its revenue climbed 16% year-over-year to $7.5 billion, and its operating income jumped 33% from last year to $1.8 billion.
Netflix expects to add an impressive 8.5 million net subscribers during the current quarter, unchanged versus the same period a year earlier when the coronavirus pandemic and the economic closures were much more intense than they are today.
The company added that it’s still very early in the process of launching mobile video games. Over time, I expect the video games to enable Netflix to meaningfully grow its subscriber base, as well as its top and bottom lines.
After all, video games are currently a big industry in the world. In the 12 months that ended in September, for example, Electronic Arts’ (NASDAQ:EA) top line was $6.4 billion, and its operating income was $1.1 billion, while its free cash flow so far this year is $410 million.
If Netflix’s video game business could generate, in two years, just 20% of those numbers, the company’s top line would get a 20% boost and its OI would rise by more than 10% just from video games.
The Bottom Line on NFLX Stock
Netflix CEO Reed Hastings, recently noting that the company’s 200 million+ subscribers were still a small fraction of the global pay TV customer base, said that Netflix has a great deal of room for growth.
I agree with that assessment. Also important to consider are the windfall that the company will likely get from its foray into the video-game sector, its significant free cash flow and operating income, and Wall Street’s recent realization that Disney+ is not a big threat to Netflix.
Given all these points, I think that NFLX stock can outperform the Nasdaq composite for the next six months.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Plug Power. You can reach him on StockTwits at @larryramer.