Netflix shares rose 29% last month, but the stock is still cheap

Here's why Netflix gained nearly 30% last month, and why the stock still has room to run much higher.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Netflix Inc (NASDAQ: NFLX) gained 28.6% in July, according to data from S&P Global Market Intelligence. After two disappointing earnings reports and a gloomy first half of the year, the digital-video veteran presented a rosier picture of its subscriber growth trends in July's second-quarter update.

Investors were quick to embrace that bullish morsel, sparking several days of rising share prices.

So what

Netflix's subscriber count fell in two straight quarters, including a loss of 1 million accounts in the second-quarter report. Management signalled an end to that downtrend, forecasting the third-quarter figure to hit an all-time high of 221.67 million global paid memberships.

At the same time, the second-quarter results were a mixed bag. Earnings came in above expectations but revenue fell slightly short of guidance and analyst estimates. Furthermore, revenue growth should continue to slow down in the third quarter as the year-over-year growth rate drops to roughly 4.7%, down from 8.6% in the second quarter.

But none of that mattered. Investors and analysts are still laser-focused on Netflix's subscriber growth, so that's the guidance target that wrote all of the company's headlines for this quarter.

Now what

That extreme focus on subscriber growth is a mistake. That used to be the most important figure in Netflix's quarterly reports, but the company is shifting gears as we speak. The streaming video service is now paired with a growing portfolio of mobile games. An ad-supported service tier will soon be available for price-sensitive consumers.

Netflix is also experimenting with different methods to collect revenue from people using the platform for free via shared passwords. Notably, some of these forward-looking initiatives should add to Netflix's top and bottom lines without lifting the subscriber count. Therefore, subscriber growth shouldn't be the headline-writing metric anymore.

So the stock posted a sharp gain of almost exactly 30% in July, but that boost started from a multiyear-low market bottom. Netflix stock is still a tremendous bargain, trading 35% lower in 2022 and 57% below November's all-time highs.

These discounts will only last until market makers wise up to the shifting direction of Netflix's business goals. It could take a few quarters before that message really sinks in, much like it took about two years before the shares fully recovered from the Qwikster debacle -- also known as the start of the game-changing digital streaming era.

It looks like history is about to repeat itself here. So why not grab some Netflix stock while it's cheap?

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Anders Bylund has positions in Netflix. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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