Netflix just proved 2 elements of the Stock Bull Thesis

Netflix just proved 2 elements of the Stock Bull Thesis

As Netflix (NASDAQ: NFLX) announced its third quarter earnings after the market closed on last Tuesday, the headline figures were a bit of a mixed bag. Revenue of $6.44 billion rose by about 23 per cent year on year, while net profits of $790 million rose by about 19 per cent. Customer demand spiked, attracting only 2.2 million additional subscribers, slightly behind the estimate of Netflix's 2.5 million. Heavy consumer development sent investors to flee, and the stock slipped by around 7% on Wednesday following the survey. Two big metric short-sighted analysts have completely dismissed the fact that, taken together, they provide convincing proof that the valuation case for Netflix is largely unaffected and that the bulls have been right all along. Free Cash Flow ( FCF) has long been a frontline metric for Netflix bulls and wolves. Bears points to the rising red ink that mars Netflix 's revenues as evidence that the company is unlikely to survive. To their point, the FCF of Netflix was $3.3 billion negative for 2019. Management argued at a time when it claimed last year was the height of its FCF shortfall, anticipating a shortfall improvement of $2.5 billion in 2020. Bulls, for their part, have often protested in favour of the virtuous cycle. By investing aggressively on programming, Netflix would draw more subscribers, using the money from those viewers to produce new programming that would draw more new subscribers. At some point, the cycle will become self-sustaining, particularly when Netflix takes its foot off the pump when it comes to producing new content. The pandemic has given a sneak peek at how it could look. Many of Netflix's production facilities were shut down earlier this year, not only turning FCF into black, but also giving a glimpse of what the future could bring. Netflix has now produced three consecutive quarters of positive FCF. Management is now forecasting that FCF will be "slightly negative" for the fourth quarter and plans to raise around $2 billion in FCF in 2020. This serves to explain what will happen as Netflix finally tries to limit its investment on new content: optimistic FCF will become a law rather than an anomaly, and the company's goal is to become a cash flow machine.

An option to buy?

Since reaching an all-time high back in early September, Netflix shares have plunged by 15%, as investors fear the coronavirus-induced growth story has stalled. However, considering the long-term potential and the power of the bull 's argument, investors with a sufficient time frame (three to five years) should see this as an opportunity to open up a role or add to a current one. There is a whole wide world out there, and the success story of Netflix is far from over. Kaynak: fool.com