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Why the Netflix share price could have even further to go

Picture of a Netflix menu screen
Image: Netflix

On 31 July, I wrote an article comparing the Cineworld share price to the Netflix (NASDAQ: NFLX) share price. I had reservations about Cineworld’s prospects due to its gigantic pile of debt. Its share price has barely moved since, and I think that’s because investors are unsure of how the pandemic is going to play out over the winter.

However, I was bullish on Netflix. And it turns out I was right. Since 31 July, its share price has shot up 23% from $519 to $639 today. And it’s up 21% in the past year. As a current investor, I’m obviously happy that my investment has done so well. But this is the kind of performance I’d hope to get out of my more speculative stocks. So what’s going on?

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Subscriber growth

The streaming company delivered its Q3 results today. Revenue is up 16% year-over-year to $7.5bn, while operating income rose 33% to $1.8bn compared to Q3 2020. Netflix now has earnings of $1.7bn, a 17% increase year-over-year.

It added an additional 4.4m subscribers, which was 900,000 more than projected. It added 1.5m extra last quarter, and 2.2m in Q3 2020. Moreover, it expects to add 8.5m more subscribers in Q4. And average revenue per membership also rose 7% this quarter. 

There’s more good news. While Netflix lost 430,000 North American subscribers in Q2, its reversed this trend and has added North American subscribers in Q3. And encouragingly, half of its new Q3 subscribers came from the Asia-Pacific region, which is a key geographical area for growth.

Unique content

One key concern I had for the Netflix share price was that the company’s original series would lose out to competition from Disney, Apple, and Amazon. But Netflix now holds a 45% market share in global demand for original shows. Runaway hit Squid Game was streamed by 142m households in just 28 days. According to Parrot Analytics, this made it the most watched show in the world between September 26 and October 16. 

And with new series of Stranger Things, Sex Education, The Witcher, Tiger King, and Cobra Kai, there’s plenty more content with that unique Netflix flavour to consume. The streamer is also purchasing the Roald Dahl Story Company. And the company expects its “strongest Q4 content offering yet”. 

It’s also launching into online gaming. I’m a little concerned about this as diversifying from its core business could put it off track. But the company has plenty of cash to experiment with — and as a long-term investor, I’d rather they spend it on growing than let cash reserves build unnecessarily high. It has just acquired the Night School Studio, and is already developing new games. Initially, gaming content will be available free to subscribers, which will give the service a unique selling point. And with Netflix boasting 214m subscribers worldwide, it’s even possible it could become a global gaming giant.

My bottom line for the Netflix share price

Competitors Disney, Apple, and Amazon all want a slice of the streaming pie. These aren’t the sort of competitors that can just be ignored.  I expect many consumers will want to subscribe to Disney+ to watch original Marvel and Star Wars content. And with a cost of living crisis descending on consumers, many will be forced to choose between streaming providers. But I think, for now, that Netflix is destined to grow. I may be adding to holding.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon and Netflix. The Motley Fool UK owns shares of and has recommended Amazon, Apple, Netflix, and Walt Disney. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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