Netflix and Dread

The streaming giant disappointed investors after the close yesterday as its earnings report brings fear that the boom from Covid-19 may be over.

Going into earnings, Netflix had experienced another great quarter, rallying over 20% to $527 as Coronavirus continued to keep consumers at home with little else in the way of entertainment options. Even in the days leading up to earnings, Goldman raised their price target on the stock to $670 and Morgan Stanley to $575 on the view that strong subscriber growth will continue to be pulled forward due to the pandemic, and the high quality of content on offer.

However, as Netflix reported after the bell yesterday, it was quickly clear this was not another blowout quarter as predicted, as 10 million new subscribers were added in the quarter vs 12 million expected. Their forecast for the following quarter also scared investors, with the company predicting 2.5 million new subscribers in Q3 - less than half of the 5.27 million expected. Netflix noted that much of their subscriber growth has been pulled forward to the first half of this year and they therefore expect much less growth going forward for the rest of 2020.

Shares plummeted and are currently down -9% in the pre-market at $500. So does this mean the show is over for Netflix in 2020? In my view, there still remain reasons for investors to hold on. Here's why.

Firstly, content growth drives subscription growth, and Netflix has reassured investors that originals for 2021 are set to be higher than those for 2020, and production has already kicked off across Europe and is coming back in the US also.

Viewership remains just 10% in the US. Yes you read that right. It may feel like every man, woman and child has a subscription to Netflix but the subscription opportunities remain incredible in the US, as well as in other developed and emerging market regions.

There is also the increased likelihood that we won't be returning to a new normal any time soon with the US yesterday having its highest number of new Covid cases in a day whilst emerging markets also struggle to cope.

Add to this the reassurance that improving cash flow means Netflix is unlikely to head to the debt markets this year and is likely to soon be cash flow positive, and there are still reasons to have faith that Netflix is on its way to become the Tiger King of the streaming jungle...