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When Is a Good Time to Buy Netflix (NFLX)?

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Netflix (NFLX - Free Report) reported earnings of $1.74, well short of the Zacks Consensus Estimate of $2.13 and up 18.4% from $1.47 in the September quarter of 2019.

Revenue of $6.44 billion was better than the estimated $6.39 billion and up 22.7% from a year ago.

The disappointment was mostly related to net subscriber adds, which at 2.2 million were slightly short of the 2.5 million Netflix forecasted but significantly lower than what the street was hoping for. Netflix had already warned that this was likely to happen as demand was pulled into the first half of the year when the pandemic forced people to stay home, and in many cases, with much more free time.

With 15.77 million new subs in the first quarter and another 10.09 million added in the second, it’s perhaps natural that analysts didn’t take Netflix’s own third-quarter estimate seriously. After all, how bad could it really get?

But the real question is, is it really so bad?

The total adds for the first three quarters comes to 28.06 million, which is higher than the 27.8 million added in all of 2019. And Netflix expects to add another 6 million in the fourth quarter, which will take the annual tally to an all-time high of 34 million this year.

Also, while the pandemic pushing people home may have been a positive for viewership, the fact that production had to be halted was obviously bad for content creation, which is what retains them. Netflix was at an advantage because it had more content available than just about anybody else out there, but there are content schedules for next year that were impacted.

As things stand now, the company is fully operational in most regions and management has said that 2021 production is by and large on track.

The first half of 2021 will of course see tougher comps, but there’s no reason to assume that there won’t be further growth next year. Especially considering that its Asia Pacific business is growing into a more significant contributor.

Even if we see some maturing/saturation in the U.S., Netflix may be able to build on the strength it’s already seeing in South Korea and Japan to deepen its penetration in other countries, like India. And things will balance out. At least that seems to be the plan.

So here we have a company that is obviously growing its user base much stronger this year than in the past. It’s growing in really big international markets as well. It has the kind of original content library and pipeline that none of its competition can match in the near future, which allows it to raise prices periodically. Throw into that the steadily growing balance sheet cash that should enable it to reduce its dependence on borrowings in the not-too-distant future. We have the makings of a truly successful media company that’s also built on technology for the future.

There’s no reason to be bearish on Netflix. But even after shares dropped 5.3% yesterday and another 6.4% today, Netflix shares aren’t cheap. It’s a good idea to let the shares fall where they will and wait for the line to flatten a bit before getting in.

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