If you have been reading my articles, you know that I am generally a buy and hold investor. Before I decide to buy a company, I do considerable research to see if that company meets the criteria on my checklist. Once I buy a stake in that company, I hold ideally for at least three years, possibly longer and add more money to that company if and when that company executes well.
To find out if a company is doing well, I review the quarterly earnings for my companies. Netflix is a core holding in my and my kids portfolios so I follow it closely. Netflix is reporting its Q1 2021 earnings after the market closes Tuesday. You can check out the previous earning reports at this link.
Oftentimes, you would see a stock price move up or down significantly after an earnings report is announced. If you are following the earnings reports of your companies, you would know whether a fall in price is a buying opportunity or a falling knife.
Before a company reports its quarterly earnings, I usually spend a few minutes reviewing their earnings from the previous quarter and look for things to watch in their next earnings report.
In the rest of this article, I will post my notes from Q4 2020 of Netflix earnings and things that I am watching in the report that they will release tomorrow after market close.
Netflix management has long maintained their long-term target of adding 25-30 million subscribers every year. Sometimes, they will add more subscribers in one quarter and less subscribers in the next but overall, their goal is to add 25-30 million subscribers per year.
For example, here is how their subscriber adds were in 2021
Q1 2020: 15.77 million
Q2 2020: 10.09 million
Q3 2020: 2.20 million
Q4 2020: 8.51 million
Total 36.57 million
As you can see they handily exceeded the subscriber goals that they set for themselves for 2020. Because they added almost 26 million subscribers in the first half of 2020, their subscriber numbers in Q3 and Q4 were less than previous quarters. But guess what, the market did not like that and shares fell down after the Q3 report. You can read the article after Q3 2020 at this link.
This is what I call a buying opportunity to add to a long-term position. Think about this for a minute. You have a company who met most of their annual goal in the first six months of a year and because they only added 2.2 million subscribers in Q3, that is seen as a disappointment in the eyes of some analysts. However, because you are watching the earnings report every quarter, you know that this is not a miss, they had a “pull-forward” of subscriber numbers due to COVID and they will easily exceed their yearly target.
Selling a company because it did not execute well in 90 days is not a good strategy. Sometimes, companies will go through a period of change in a strategy and you have got to give it time to execute. Usually, I will stick with a company for 4 quarters to decide if this is temporary or if this is a permanent trend.
As Netflix is scheduled to release its earnings report tomorrow, these are the things that I am watching. Netflix is forecasting to add 6 million global subscribers in Q1 2021. They are also forecasting revenue of $7.1 billion which is expected to grow about 23% compared to Q1 2020 revenues. More closely, I am watching the bottomline numbers. Netflix is expecting its Operating margin to get to 25% (up from 8.4% a year ago) and their Net Income to more than double (from 587 million to 1,355 million) from a year ago. They are also expecting their Earnings Per Share (EPS) to grow to $2.97 (from $1.30 a year ago).
Whenever a company releases earnings, most of the investors will look at the stock price to decide how the earnings report was but as I mentioned in this article, stock price is noise, it is not a signal. Many times the stock price will fall (For example: see Q3 2020 above) for reasons that have nothing to do with the company’s performance.
If you will zoom out, you will see a company whose subscribers have grown from 111 million in 2018 to 204 million in 2020. That is almost a double in 3 years. You might think that 204 million is a pretty big number and they cannot grow any further but think globally and the management estimates that there are almost 1 billion people on the planet that they can reach. I view Netflix as a utility company that everyone will subscribe to. In our household, Netflix is the core service that we subscribe to. We have Hotstar, Disney Plus and Amazon but Netflix is the one we watch the most. I suspect that is the case in most households. They are turning cash flow positive this year meaning they won’t need to borrow any money in the future. They are expected to reach an operating margin of 25% and stay there. On top of that, they are still pretty cheap compared to other streaming services (less than $20 per month). They have pricing power and they can keep raising their price by $1 or $2 every couple years and won’t miss a beat.
I have no idea what Netflix price will do tomorrow. You can give me the numbers for Q1 2021 beforehand and I still would not be able to tell you how the market will react to those numbers. But I do believe that the stock price will at least double in the next five years (that is an annual return of about 15% and I am happy with that).