After the release of its financials for the first quarter of 2021, Netflix shares were hammered in after-hour trading last night, dropping from over $550 to below $500. Reason: For the seventh time in the last 21 quarters, the company undershot its projected subscriber growth number.
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Just like Mr Market was once focused exclusively on Apple’s iPhone sales (ignoring issues that mattered more), with Netflix he’s obsessed with the subscriber growth number. After breaking through 200m subscribers in the December quarter, Netflix added 4m new members in Q1. But it had projected growth of 6m. So despite record revenues (above), the share price fell 11%.
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Once the dust settles, investors will take a more wholistic view of the financials. When they do, they will find much to be encouraged about. For instance, the reverse was well flagged. Netflix continuously warned a “lighter content slate” caused by lockdown cutbacks, would hurt subscriber growth. Product is now flowing again. So Netflix expects a bumper second half of 2021.
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More relevant, though, is the group repeated last night it remains on track for free cash flow to hit breakeven for the first time in 2021. That means Netflix will no longer need to borrow to fund growth. For every exponential business, that’s a massive milestone, witness Amazon, Google, Facebook. As a result, long-term investors may well view Netflix shares below $500 as a buying opportunity. I do.
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