The Overlooked FAANG Could Give You Big Gains

NFLX movies

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    FAANG stocks have been popular in recent years. But most of the media attention seems to be focused on just two of the five companies. Facebook (Nasdaq: FB) and Apple (Nasdaq: AAPL) seem to enjoy a disproportionate amount of news coverage.

    There’s also quite a bit of news about Amazon (Nasdaq: AMZN) and Alphabet (Nasdaq: GOOGL), the parent company of Google. But, there seems to be less news about Netflix (Nasdaq: NFLX).

    That’s perhaps because Netflix has quietly become a part of everyday life for millions of subscribers.

    A Company That Has Constantly Evolved

    Netflix is now an over the top media services provider. The company was founded in 1997 and its initial business model included DVD sales and rental by mail. The founder Reed Hastings stopped DVD sales about a year after Netflix’s founding to focus on the DVD rental business.

    Netflix

    Source: BlueMint via Wikipedia

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  • In 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service. The company expanded internationally, with streaming made available to Canada in 2010 and continued growing its streaming service from there.

    Netflix is now available in over 190 countries, everywhere in the world except Mainland China, Syria, North Korea and Crimea according to The Wall Street Journal.

    Still evolving, Netflix entered the content-production industry in 2012, debuting its first series, Lilyhammer. It has greatly expanded the production of both film and television series since then, offering “Netflix Original” content through its online library of films and television.

    Netflix releases more than 100 original series or films a year, more than any other network or cable channel.

    As of July 2018, Netflix had 130 million total subscribers worldwide, including 57.38 million in the United States.

    Evolution Drove Growth

    All of these changes can be seen in the company’s financial statements. Revenue has grown an average of 27.3% a year over the past seven years. Earnings per share (EPS) growth averaged 16.7% a year over that same time.

    But, the company financed much of that growth with debt. The company’s balance sheet shows that debt increased an average of 33.3% a year over the past seven years. The cost of servicing that debt grew an average of 48.5% a year.

    But, the company always seems to have a plan to roll out something new. Now, according to TechCrunch “Netflix,  in its own words, is “testing the iTunes payment method” in 33 countries.

    “More specifically, Netflix is testing how to bypass iTunes. Until September 30, new or lapsed subscribers in selected markets across Europe, Latin America and Asia will be unable to pay using iTunes. They are instead getting redirected to the mobile web version to log payment details directly with Netflix.

    Others like Spotify also have moved users away from using iTunes to pay for subscriptions.

    It’s notable that both Spotify and Netflix have something else in common: Apple has made many big moves to encroach on their space, and thus it makes little sense for either company to cut Apple in more than it has to on its direct customer relationships.

    Netflix’s iOS test was first spotted by NDTV in India last week, with users also flagging changes on Twitter. Journalist Manish Singh (in a tweet he then deleted) subsequently said Netflix was running a two-month experiment.

    A customer support agent contacted by us earlier today confirmed that the test has actually been running since June, starting first in 10 countries and then expanding to 33 from August 2 until September 30.”

    This isn’t the first time Netflix took steps to increase margins. In May, the company stopped allowing new or rejoining customers to use Google Play to pay for its service.

    “If you are currently billed by Google Play, you can continue to use Google Play billing until your account is cancelled,” the company notes on a help page about the change, which is in line with how it appears to be testing billing now on iOS.

    This could sharply increase Netflix’s bottom line. Apple takes an estimated 30% fee on the first year of a subscription and 15% in subsequent years.

    This Could Move the Stock

    The stock has been pulling back after the company delivered a disappointing earnings report last quarter.

    NFLX weekly chart

    Analysts liked the news about direct subscription and that could be a catalyst for reversal in the stock price.

    SunTrust Robinson Humphrey noted that high-margin licensing could yield more than a billion dollars in operating profit within a decade. This isn’t a new concept, but it’s also not one that seems to have been central to many investors’ thinking lately.

    “Netflix should a have long-term opportunity to grow consumer merchandise licensing revenue and profit while also using it as a way to drive (and fund) content and platform awareness and buzz,” they wrote. (At $1 billion around 2026, that would be some 18 times their estimate of last year’s figure.)

    They upgraded the Barron’s Next 50 stock to “buy” from “hold,” setting a $410 price target on the shares—17% above current levels and about 11% higher than FactSet’s mean—while noting their dip since the company reported Q2 results in July. (Their previous target was $415.)

    Imperial Capital suggested that the aforementioned sign-up tests might an indication of strong current subscriber growth, boosting their EPS estimates. Also in the past few days, MKM Partners called the stock a “must-own for growth managers.”

    SunTrust also cited optimism about subscriber tests that may be implied by the billing tests Imperial mentioned, said their tracker of domestic subscriber growth has them thinking the current quarter could come in ahead of guidance.

    The analysts noted India is a crucial market and the company needs to find ways to counter built-in challenges regarding broadband adoption and a market accustomed to paying less for TV services.

    The stock chart shows that this could be an ideal time to add NFLX to a portfolio. The daily chart is shown below.

    NFLX daily chart

    NFLX could be at a turning point as a company and the recent low could turn out to be an important bottom in the stock price.

    Investors interested in adding exposure to FAANG stocks could find NFLX to be the more profitable choice as the company continues to evolve. This is especially true given Netflix’s proven ability to create profits by tweaking its business model.