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This Quote From Netflix’s CEO Spells Great News for the Company’s Future

Many investors are writing off Netflix (NASDAQ: NFLX). Although the company’s shares jumped slightly following its latest quarterly update — primarily due to better-than-expected subscriber loss numbers — the stock is still down 63% year to date. But is this an overreaction to Netflix’s problems? I think so.

Although Netflix certainly has some work to do, important long-term tailwinds are playing in its favor. During the company’s second-quarter earnings call, co-CEO Reed Hastings made a prediction investors should pay attention to. Let’s see what Hastings said and what it could mean for the company’s future.

The end of an era?

Despite a recent downward trend, Netflix’s paid subscriptions have been on an upward trajectory for over a decade. The company ended the first quarter with about 221 million paying members. However, the company does not believe it has peaked. Hastings said during the second-quarter earnings call on July 19, “But looking forward, streaming is working everywhere. Everyone is pouring in. It’s the end of linear TV over the next five, 10 years.”

Let’s remember that Netflix was the pioneer in transitioning audiences from linear television to streaming. Outside of China, there are between 800 million and 900 million broadband or pay-TV homes worldwide, according to management, meaning this form of entertainment is hardly dead. The data showed that as of the third quarter of last year, cable and broadband still commanded 64% of television time in the U.S., a country where streaming has reached higher penetration rates than it has in most other places.

If linear television were to die off within 10 years, that would spell a massive opportunity for both subscribers and viewing time to move to streaming platforms. Netflix wouldn’t be the only beneficiary of such an outcome — the streaming industry is very competitive. But it would undoubtedly be one of the biggest winners, given the brand name it has built in the industry and its large content library, which has racked up dozens of awards over the years.

The long-term view

So is Hastings correct that linear television will be gone within 10 years? No one can say for sure, but that seems highly unlikely to me. To be clear, the cord-cutting trend has been well documented, and streaming is likely to overtake linear television eventually. Data shows millennials and Gen Z audiences are more likely to be subscribed to streaming services than baby boomers.

However, this evolution will take much longer than 10 years. So what does that mean for Netflix and its shareholders? It’s easy to focus on the past few quarters when Netflix’s subscriber numbers declined sequentially.

But zooming out helps. In terms of subscriber growth, the long-term horizon for Netflix could look somewhat similar to the past. Meanwhile, revenue is still increasing, albeit at a slower pace. In the second quarter, the company’s top line increased 8.6% year over year to $8.0 billion, in part due to an increase in average revenue per membership and despite the company losing about 970,000 subscribers.

Also, engagement is up for the company. It is commanding more and more viewing time. From June 2021 to June 2022, Netflix’s share of television viewing time in the U.S. increased 1.1 percentage points to an all-time high of 7.7%. The company’s free cash flow for the quarter was in the green — $13 million — compared to the negative $175 million it reported in the year-ago period.

Netflix is guiding for $1 billion in free cash flow this year. The company hasn’t made it a habit to deliver positive numbers in this area for the better part of the last decade, so this is an encouraging projection. It may grant Netflix the flexibility to produce even more quality original content, which means even more engagement and viewing time.

Don’t give up on Netflix yet

Netflix has encountered plenty of headwinds over its storied history in streaming. Perhaps its current problems are a bit harder to deal with, but there is plenty of fuel left for growth. Netflix’s management has steered this ship too well in the past to let it sink now.

The company is testing solutions to some of its problems, including the password sharing issue. More quality content is one of the answers to competition. And Netflix is still hitting it out of the park in this area. Short-term issues may continue to weigh on Netflix, but the company’s future still looks bright.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.

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