Paul Reacts To Netflix Stock Earnings

Netflix's stock fell over 7% after hours as the company missed revenue and profit expectations. The speaker clarifies that missing guidance doesn't mean declining, but rather falling short of projections. He advises against making investing decisions based on short-term market fluctuations and suggests using such drops as opportunities to buy into great companies at better prices.

Netflix reported 17% revenue growth, a significant achievement for a company of its size. Operating margin was 28%, below the 31.5% guidance due to a dispute with Brazilian tax authorities. Engagement remains strong with record quarterly view share in the US, indicating sustained user interest. The company also announced strong ad sales and live boxing matches, with an upcoming NFL Christmas game day doubleheader.

Revenue has shown consistent growth over the past quarters, with a forecast of almost $12 billion for Q4. The speaker highlights the improvement in Netflix's free cash flow, which is now aligning more closely with net income, a positive sign for the company's financial health. Returns on capital are high and improving, reaching 17% annually over the last five years.

The speaker reiterates the importance of long-term investing, warning that 'a great story can become a bad investment if you pay the wrong price.' He suggests using a stock analyzer tool to determine intrinsic value and emphasizes not falling in love with a company before analyzing its financials. He outlines his adjusted assumptions for Netflix's valuation, including higher revenue growth (6-14%), profit margins (18-26%), and a premium PE ratio (18-26) due to Netflix's market leadership.

The speaker adjusts his valuation parameters, including a 10-year analysis with revised revenue growth and profit margin expectations. He also suggests a higher premium for Netflix's PE and price-to-free cash flow due to its strong market position. He explains how a higher desired return creates a margin of safety, lowering the calculated intrinsic value. Based on his analysis, he would add Netflix to his watchlist at $700 per share, anticipating a waiting period for the price to fall.