Buy this Netflix (NFLX) dip? Let's explore.
First. I'll clue you in. I am not the biggest fan that Netflix has among their subscribers. Don't get me wrong. I am a big fan of Uhtred of Bebbanburg, the lead character of "The Last Kingdom", but I find myself much more likely to seek out the few hours I put aside for fictional entertainment elsewhere. You see, while Uhtred is interesting, the seasons are short, and I age as I await new seasons.
I also find interest in EZ Reyes of "Mayans MC", and the whole crew at "Letterkenny" at Hulu, and nobody, I mean nobody holds a candle to "The Mandalorian" at Disney (DIS) Plus. I mean who hasn't dreamed of being one of the last of a warrior race driven by a purity in ethics to protect a child of unknown origin from a long list of evil-doers out to do the little tyke some harm? That's the stuff that 12 year-olds and nearly 60 year-olds alike dream of at night.
So, let's look at the quarter that Netflix reported.
For the firm's first quarter, Netflix reported EPS of $3.75, which easily beat expectations. Revenue generation for the three months landed at $7.16 billion, also good for a beat, and good for year over year growth of 24.1%. Sounds good? Yes, sounds good... so far. The headline level problem as I am sure you well know by now is attracting new subscribers. The service attracted "just" 3.98 million new customers for the first quarter, badly missing both the 6.29 million that Wall Street had been looking for, and the 6 million that the firm itself had forecast.
One could say that the pandemic pulled incredible growth forward into 2020 and they would be correct, thus making comps difficult. That said, this does not let the community of sell-side analysts off of the hook for being so far off, as a group, which makes one wonder just what they were looking at, or how many of them are actually doing the homework. This also does not let the company off of the hook for not warning ahead of time on this metric when they knew that their own guidance had probably been the catalyst for Wall Streets' embarrassing slapstick comedy routine.
The firm is in good shape. Don't mistake my lack of enthusiasm for a lack of understanding that the firm is on much firmer ground than it once was.
Netflix reported net income of $1.71 billion that led to free cash flow of $692 million. Obviously the lack of new production during the height of the pandemic in the U.S. actually helped with controlling expenses, but as I have alluded to above, the platform is out of ammo if you have been with them for a while. They need new content and creating/acquiring that content is quite costly, more so than it is for some of the who's who that comprise the competition.
That said, let's not forget that a Netflix subscription is simply more expensive per month than is the competition. Now the firm has not seen a whole lot of churn yet, but we'll now when we see what these competitors report, whether the entire industry is slowing after a period of intense growth or if new customers are being price sensitive. I mean, a family on a budget, especially somewhere in the world where that family is not being backed by the federal government as the pandemic has taken/is taking its toll, probably will opt for lower priced alternatives.
We spoke of the Walt Disney Company. A ton of content here. This is Disney Plus, Hulu and ESPN Plus. Now, Hulu gets the NFL. The Disney bundle, which offers all three for a discounted rate is cost comparable to Netflix. So, now Uhtred isn't just fighting EZ Reyes, and the Mandalorian, but EZ Reyes, the Mandalorian, and Julius Randle of the New York Knicks. As the U.S. economy continues to strengthen, so will all of the other businesses run by Disney, which will easily subsidize new content creation.
There's Amazon (AMZN) Prime Video, and its ever growing library of content. Amazon also can use several very profitable outside businesses to create cash flow, and offers a lot more than just streaming entertainment for the price of an Amazon Prime subscription. Do we need to discuss Peacock from Comcast (CMCSA) or Paramount Plus from ViacomCBS (VIAC) ? I have heard that Captain Pickard has a few fans. Speaking just for myself, I have yet to subscribe but Discovery (DISCA) Plus looks pretty good. All are cheaper for the consumer. All sit on a mountain of content.
Guidance & News
I took a look at the firm's Q2 guidance and had a couple of thoughts. Netflix sees revenue generation at $7.3 billion versus expectations of $7.4 billion, but EPS of $3.16 versus expectations of $2.70, so obviously they are thinking that expenses remain subdued. That said, the firm sees streaming paid net subscriptions of 1 million versus projections up around 4.28 million. This means to me that either the firm expects a really bad three months to turn into a really bad six months, or... and this is a big or... because they spit the bit this quarter, they might be intentionally conservative going into the second quarter. I mean 1 million? That's called "grinding to a halt" if you're Netflix.
Look at This
Netflix as a stock has been stuck in a long period of basing consolidation, really going back to last July. With the exception of a Q4 earnings related pop in January that lasted a few seconds, the stock has been unable to rise above $575, and more recently even $565. For support, since early 2021, the low $490's have worked. This morning's selloff has not impacted that. Should that level crack, then I think we look at prices close to $460.
The Walt Disney Company reports in mid-May. Right now, as I type... The stock is testing established $181 support for a fourth time since February. The level cracks, DIS is looking at prices in the $160's. The level holds? Again? with the 21 EMA close enough to retake the 50 day SMA on a rally? Hey, I don't know, but this is interesting and if the level holds, next week, we'll all say of course it did.
You want to play a streaming business that may be in decline? Go buy the dip in Netflix. You want to play a network of growing streaming businesses still growing rapidly (as far as we know) just in case a large part of the world remains shut-in longer than they would like, and as a hedge against the pandemic economy... a world that includes vacations, theme parks, hotels, dining out, cruise ships and the cinema, then maybe one takes down a chunk of Disney at support and sells something against the position just to reduce net basis - in case you're wrong.
How to Play the Netflix Dip (in minimal lots)
- Leave NFLX alone.
- Purchase 100 shares of DIS at or close to $181.
- Sell one DIS May 21st $192.50 call for a rough $2.60
- Sell one DIS May 21st $170 put for about $2.60.
Net Basis: $175.80
Worst Case: Long 200 shares of DIS upon expiration at a net basis of $172.90 with the share trading below $170.
Best Case: Called away on 100 shares upon expiration at $192.50 for a profit of 9.5%.