Netflix Engagement Growth Is Slowing. Here’s Why I Bought More Anyway.

Netflix (NFLX -0.86%) reported a 2% year-over-year increase in total viewing hours in the first half of the year, yet customers are using the platform fewer days each month. Average viewing time per subscriber has also declined. Despite this decline, I recently added more Netflix shares to my portfolio. The stock is near its end-of-October level, positioning it as an attractive investment opportunity.

The streaming giant faces competition from social media, podcasts, video games, YouTube, and other free entertainment options. This dynamic has led to some users viewing Netflix as appointment viewing rather than casual background entertainment. However, Netflix maintains its premium status with big-budget drama series and live events.

Netflix's churn rate improved year-over-year despite price increases in the third quarter. The company's scale allows it to invest heavily in content due to amortization across a larger viewership. Its extensive data on viewer preferences enables effective content budget allocation, resulting in steady operating margins, growing earnings, and robust free cash flow. Management returns excess cash flow to shareholders via share repurchases, driving strong earnings-per-share growth.

The company's operating leverage remains appealing, with room to expand operating margins in the future. Even modest revenue growth could lead to solid returns for investors. Despite investor concerns about user engagement, Netflix's stock price fell to 17.7 times forward earnings expectations, making it an excellent buy at the current price. The Motley Fool's Stock Advisor team predicts the 10 best stocks to buy right now, with Netflix among them, offering a market-crushing return of 823% compared to the S&P 500's 209%.