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Netflix is ​​trading at a historic low of 10 years, which means this is a great time to discuss the pros and cons of this stock if there is a potential upside.

The discussion lagged on Netflix is ​​that there was a drop in subscribers in Q1 of 200,000, excluding Russia and a drop in subscribers of 970,000 in Q2. While critics believe this is due to burnout, it’s more likely that the decline stems from a drawdown due to Covid as all media stocks – both streaming and social media – are showing massive audience growth through Q2 2021. As such, Netflix faces some tough challenges. quarter for audience growth comps.

FILE – This photo shows the company logo and a view of Netflix’s headquarters in Los Gatos, California, … [+] 29, 2010. Netflix lost nearly 1 million subscribers during the spring amid tougher competition and soaring inflation that weighed on households budget, increasing the urgency behind efforts by video streaming services to launch cheaper options with commercial disruption. The April-June contraction of 970,000 accounts, announced Tuesday, July 19, 2022, as part of Netflix’s second-quarter earnings report, was by far the largest quarterly subscriber loss in the company’s 25-year history. (AP Photo/Marcio Jose Sanchez, File)

Netflix’s management was clear that this quarter was “less bad” as they hinted the company wasn’t really celebrating the results. The company is technically back to next quarter growth for customers with a guidance of 1 million, but this is a marked decline from the 4.4 million in last year’s quarter. As already discussed, due to the overall impact on many media stocks from the shelter, it would be rushed to believe that something is wrong with individual companies when the entire media industry is affected. Better to hold that conclusion until H2 2022 to H1 2023 after giving it a full year after the formidable Covid company has gone. Ultimately, media is highly seasonal, and we’ll have to take a quick look at which companies emerge stronger in Q4 2022, as this was the seasonally strongest quarter.

With that being said, there’s already evidence that Netflix is ​​taking up more market share than its peers. In fact, Nielsen increased Netflix’s market share for engagement to 7.7% from 6.6%, which puts Netflix in the lead over other competing subscription services. This is because of high-quality content like Stranger Things 4, which reports 1.3 billion hours of streaming.

With that being said, there’s already evidence that Netflix is ​​taking up more market share than its peers. … [+] In fact, Nielsen increased Netflix’s market share for engagement to 7.7% from 6.6%, which puts Netflix in the lead over other competing subscription services.

Advertisers tend to pay top dollar for Hollywood-grade Netflix content. It’s not just the 100 million people sharing passwords that illustrates what can be picked up for a lower price tier, but also the high level of engagement garnered by the company’s content can make a fine equation for industry-leading ARPU due to demand from exclusive advertisers that bundled with the supply, or premium content, that Netflix offers.

Due to FX drag, Netflix lost revenue in the last quarter with 9% revenue growth compared to 9.7% forecast. However, based on constant currency, revenue growth is 13%. The same goes for Netflix’s guide, it’s an error due to FX drag at 4.7% for the upcoming third quarter, but based on constant currency, it’s a 12% guide on revenue and beats in that regard.

Above: I/O Fund Portfolio Manager, Knox Ridley, discussing Netflix’s earnings results.

Not surprisingly, operating margins were also impacted by a strong dollar of 20% in the current quarter and 16% for the third quarter. A strong dollar led to slightly better EPS as Netflix saw an unrealized gain of $305 million from F/X’s re-measurement of Euro debt.

The most important line item for Netflix is ​​the company’s cash flow. Looking back, this was a pain for Netflix as the company lost $3.3 billion in cash in 2019 building its original content channel. However, the company is on an entirely new trajectory with $1 billion in free cash flow expected this year and “substantial” free cash flow in 2023, according to Netflix management.

A new and improved trajectory in free cash flow is unlikely to change a company’s debt level any time soon. Netflix firmly set expectations for $10 to $15 billion in debt going forward. This is necessary to continue to maintain its position as a top media company in terms of revenue and engagement. Gross debt reached $14.3 billion, when accounting for $5.8 billion in cash, net debt was $8.5 billion. The company has been able to increase the amortization ratio of cash to content expenditures from 1.6X to 1.4X in 2021 and is expected to be 1.2-1.3X in 2022.

The company has been able to increase the cash content to content expenditure amortization ratio from 1.6X … [+] to 1.4X in 2021 and is expected to be 1.2-1.3X in 2022.

Forward-Looking Catalysts:

Netflix has several new avenues for monetization and for re-accelerating subscriber growth. The company is rolling out a new password sharing plan and is now also partnering with Microsoft on advertising to launch in 2023. More time than not, cross-selling generates higher revenue where someone who normally churns can now be monetized through ads. Likewise, viewers who can try Netflix may decide to upgrade to remove ads. Ultimately, the move towards advertising also helps Netflix become more recession-proof if households decide to cut costs.

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Risks:

We don’t see the current number of soft subscribers as a sign of saturation. Netflix has increased in market share over the past year. Instead, the weak subscriber count is a result of the forward pull almost all media companies are experiencing from Covid. We fully expect Netflix to return to normal subscriber growth due to the catalysts listed above.

On the other hand, the main risk for Netflix is ​​its debt in a rising rate environment. This could depress the company’s valuation more than its ad technology counterparts which have strong cash flows and little or no debt during more difficult macro conditions. Read also : The popular Nickelodeon series breaks into Netflix’s Top 10. Netflix cannot reduce this debt if it wants to compete with other subscription streaming services and many broadcast networks have migrated to streaming.

There is also a risk of execution with pivots from just subscribing to also including ad levels. We view the Netflix management team as the most capable in the industry to do this pivot because they have consistently solved problems in areas that are far more challenging than introducing advertising. In addition, CTV ads can be monetized with an ARPU of $40 and we believe Netflix content will set new records on ARPU. As such, even if execution risk is lower than with other management teams, Netflix is ​​likely to take a higher valuation once it’s proven the ad level will work – ETA from H2 2023.

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What to Watch: Price Action for Netflix Stock

The big picture question to ask is – is the NFLX already at the bottom? There are 3 scenarios that could unfold from the current price range, which will help us manage the risks surrounding this question: See the article : Nickelodeon fans are excited Kenan and Kel are on Netflix, but there’s still one problem.

The big picture question to ask is – is the NFLX already at the bottom? There are 3 scenarios that could unfold from the current price range, which will help us manage the risks surrounding this question.

Red: If the NFLX breaks below $185, the odds are lower, targeting the $147-$115 region. If this happens, it greatly reduces the likelihood that the NFLX will see new highs in its next growth cycle.

Orange: The current upward swing broke above $250. In this case, the odds favor a push into the $340-$405 region. In this scenario we will see the uptrend stall in this region in a bear market rally. The same lower price target will apply in this scenario.

Green: If the renewed uptrend can break above $405, the odds will shift towards the all-time high.

Netflix hit rock bottom in May while other markets continue to hit new lows. More often than not, stocks that bottom first, tend to point to the next uptrend. This is a show of power worth watching.

We have only 3 waves down from the 2021 highs. This may not seem significant, but it is. If this 3-wave move downwards turns into a 5-wave descending (red scenario), the chances of us pushing deep into the orange range are low before the next leg down.

The Relative Strength Index (RSI) has regained significant levels. Watch for the blue arrow on the RSI around 57. This is the point where the price peaked just before the waterfall moment occurred in this bear market. The fact that the recent push higher has reclaimed this level shows strength and an early sign that green/orange is likely to play out.

Conclusion: Opportunities favor a push into the $340-$405 region. As long as the next drop holds $185, the more aggressive game is to buy into that drop. The safer game is to wait for a break above $250.

Knox Ridley, Portfolio Manager at I/O Fund, contributed to this article.

As stated in the article, Beth Kindig, Knox Ridley and the I/O Fund currently do not own NFLX stock. However, Fund I/O is considering a position on Netflix and may be going into stock in the next 72 hours. Real time trading alerts are issued for every entry and exit of Fund I/O. This is not financial advice. Please consult your financial advisor regarding the shares you are buying.

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