Netflix Story

I previously reviewed the Q2 results for Netflix in this article. Netflix reported its latest quarter (Q3 2021) earnings on Oct. 19th. The company reported $7.483 billion in revenue and added 4.4 million subscribers in Q3. They were guiding for 3.5 million subscribers so they handily beat their own guidance. This is what I look for. How is the company doing as per its own guidance? Sometimes you will read headlines that XYZ company’s shares are falling because they missed the guidance. My first question is “whose” guidance did they miss? If a company is missing their own guidance consistently, that is a red flag. If they are missing guidance from other analysts, I am not so worried. 

The company is guiding for 8.5 million new subscribers in Q4 2021, diluted EPS of $0.80/share, and revenue of $7.712 billion. If they even meet this guidance of 8.5 million subscribers in Q4, then they would have added 55 million subscribers in the last two years. That is an amazing growth. 

During the earnings call, the management stated their plan is to keep growing revenue by about 20% a year and that is exactly my goal. I want to invest in companies that can grow their revenue by at least 20% per year. They want their Operating margin at about 20% this year and their plan is to manage to a 3 percentage point addition to operating margin each year. If this works out, they will have so much cash that I expect the company to start paying dividends by 2025. .

As an aside, the call featured Spencer Wong and Reed Hastings attired in Squid Games tracksuits which I found amusing. There was a lot of interesting discussion around the show Squid Game. Ted Sarandos said the content creator had been trying to sell this show for ten years. The Netflix Korean team developed the show and they thought it would be their number one show in Korea this year. No one had any idea it would become a worldwide phenomena. They said this is a great example of the Netflix process allowing local teams to bring the content forward. 

They said that it will take a number of years to develop gaming. There are no in game ads nor any fees to play the games. They will all be included in the Netflix subscription. The company is not looking at monetizing the games. This will give game developers a lot of freedom to develop games that fans will enjoy. The idea is to create experiences for fans of shows to deeply engage with the content.

If you remember that Netflix shares fell to a low of $510 after the Q1 earnings report and stayed around that price until about July of this year. Well, now they are trading at about $625, which is a return of about 22% in the last six months or so. My guess is that as the market digests the latest quarterly results and with the management on track to meet their own guidance for Q4, we will see steady increases in the stock price. I see a bright future for Netflix and I am a holder for the long-term.

Netflix Fun Fact #1

This is what I had written after Q1 2021 earnings call

I think I will be quite happy in 3 years that I bought after Q1 2021. I think that there is a transition happening in Netflix right in front of our eyes. Netflix is being turned into a value-play and maturing into a profitable growth company. I plan to hold my Netflix stock until it becomes a dividend aristocrat. 

This part is still true although I am quite happy with the 22% in the last six months or so. 

Netflix Fun Fact #2

Netflix stock price exactly 2 years ago on Oct 21, 2019 was $276.82. In the last two years, they have released their quarterly earnings 8 times. In 7 out of those 8 times, the stock price has fallen the day after earnings. That was true this time as well. The stock fell about 2% on Oct 20, 2021. Yet, if you bought and held through these 8 quarters, the stock price has more than doubled in the last 2 years. That is an annual return of  about 36% per year. 

An update on two of my most recent holdings

In my last article on Sep. 10, 2021, I wrote about two new positions that I had bought recently: Upstart Network (UPST) and Digital Ocean (DOCN). You can read more about them here.

Well, UPST is up 31% and DOCN is up 29% since that writing. It does not always happen like this and I am not this good. Usually, if the stock price is rising, that means that the business is executing well and making progress. I did not see any press releases from DOCN that explained the price increase but UPST is firing on all cylinders. They released four press releases in the last month or so and they signed three different banks that will partner with UPST to lend money and all those banks have decided to remove FICO scores as a criteria for lending money. That is good news for UPST because this means that more banks will see this as proof that their AI lending algorithm is working.

The biggest news out of UPST last month was that they are now moving into auto lending. Previously they were only working with banks for the personal loans market and they were targeting 2022 for moving into the auto loans market. But they surprised everyone by moving into the auto loans by announcing it on Oct 6, 2021. This means that their revenues numbers will get a boost from this new business as well. They are working with car dealerships around the country to introduce their AI-based lending algorithm in this market. If you have bought a car with financing you know that it can get very complicated and UPST management is working to resolve that.

Based on this evidence, I added new money to UPST in the last month. I also sold my Docusign position and used that money to add to UPST. It does not mean that I don’t think that DOCU will do well. I think Docusign will do just fine and beat the market index over the next 3 to 5 years. I just think that the way UPST management is executing they will do even better over the next few years. Of course, I could be wrong as well. So be sure to do your own due diligence.

I did not add to DOCN yet because the share price increase in DOCN was not accompanied by any business execution that I could see. It just increased as a result of the market sentiment. I want the DOCN management to prove that they are executing well before I add more money to this position.

As more of my holdings release their Q3 results over the coming weeks, I will be sharing my thoughts. In the meantime, if you have any comments or thoughts, please feel free to share below.