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The Remarkable Rise of Netflix: A Buy Opportunity in Disguise?

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Netflix has a history of proving skeptics wrong, from the Qwikster fiasco in 2011 to the recent subscriber growth woes post-pandemic.

But like a phoenix from the ashes, Netflix has managed to bounce back, with its stock soaring to new heights.

The company’s latest resurgence comes after a challenging period during the pandemic, where it witnessed a significant drop in stock value. However, Netflix has nearly recovered all its losses and is now showing signs of another impressive comeback.

The first-quarter earnings report was nothing short of spectacular, featuring a record operating margin, the fastest revenue growth since 2021, and exceptional subscriber expansion that defied expectations.

Let’s unpack the reasons why Netflix appears to be a compelling investment option at the moment.

A remote being held in front of a smart TV

Image source: Getty Images.

The Payoff of Bold New Ventures

At the onset of 2022, Netflix faced a crisis with declining subscriber numbers and intensified market competition, sparking doubts about its growth potential.

Responding swiftly, Netflix introduced an ad-supported tier to cater to cost-conscious subscribers and provide a platform for advertisers seeking access to its vast subscriber base.

The results were impressive. The ad membership surged by 65% in the first quarter, with over 40% of new subscribers opting for this choice. The long-term vision of achieving equal monetization from ad-supported and ad-free tiers showcases the transformative power of advertising for Netflix.

Bolstered by initiatives like paid sharing, Netflix garnered 9.3 million new subscribers last quarter, driving its operating margin to a historic high of 28.1%.

Outpacing the Competition with Ease

Amidst the market upheaval in 2022 and the influx of streaming rivals like Disney, Apple, and Warner Bros Discovery, Netflix’s stock took a hit, sparking concerns about its competitive standing.

However, the tables have turned in Netflix’s favor. While it navigated to record profits, most of its competitors continue to bleed red ink.

Boasting a massive subscriber base of 270 million, Netflix stands out with its expansive content library in multiple languages, enabling it to reach a diverse global audience. This international focus sets it apart from its adversaries.

Furthermore, as a dedicated streaming service, Netflix avoided the pitfalls of transitioning from traditional media, allowing it to maintain a significant competitive edge over its peers.

Unraveling the Misunderstood Stock

Despite exceeding revenue and profit expectations in the first quarter and offering robust guidance for the second quarter, Netflix’s stock price has dipped by 8% recently.

The decision to stop reporting quarterly subscriber numbers might disappoint some investors, but it reflects the evolving nature of Netflix’s business model.

With its competitive advantages at an all-time high and earnings estimates poised for a significant upward revision post the first-quarter update, Netflix seems primed for further growth. Emerging as a dominant force in viewing time globally, with ample room for expansion, especially through ad revenue, Netflix has set the stage for sustained profit growth and stock appreciation.

Are You Ready to Dive into Netflix?

Before jumping into Netflix stock, consider this:

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Jeremy Bowman holds positions in Netflix and Walt Disney. The Motley Fool holds positions in and endorses Apple, Netflix, Walt Disney, and Warner Bros. Discovery. Comcast gets a nod from The Motley Fool. The Motley Fool maintains a disclosure policy.

The opinions expressed in this article are solely those of the author and do not necessarily reflect Nasdaq, Inc.’s views and opinions.

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