Netflix, Inc. (Nasdaq: NFLX) reported second-quarter earnings after the bell on Monday, and shareholders were shocked by the disappointing results. Netflix stock immediately plunged more than 12 percent in after-hours trading.
The popular streaming video platform beat on earnings and barely missed on revenue. The real shocker was unimpressive subscriber growth: worldwide subscribers grew by 5.15 million; the company itself had projected 6.2 million net additions, while analysts surveyed by FactSet expected 6.37 million additions.
Earnings per share came in at 85 cents; analysts were expecting Netflix EPS to come in at 79 cents in the second quarter. Revenue rose 40.3 percent to $3.91 billion. Analysts were expecting revenue of $3.94 billion.
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Heading into Netflix earnings on Monday, NFLX stock was one of the hottest in the market, soaring 106 percent in 2018 and 150 percent in the last year. After a quarter like this, shareholders may have to wait a while before shares again return to all-time high territory.
FANG stocks: The fastest to rise is the fastest to fall. Much has been written about the so-called “FANG stocks,” four of Silicon Valley’s most iconic and high-performing tech players: Facebook ( FB), Amazon.com ( AMZN), Netflix and Alphabet’s ( GOOG, GOOGL) Google.
And though Facebook and Amazon in particular seem unable to avoid the headlines in 2018, it’s Netflix that — prior to Q2 earnings at least — had been the most impressive of the four from an investor’s point of view. Through Monday afternoon, here were the year-to-date returns for each stock:
— Alphabet: +14 percent.
— Facebook: +17 percent.
— Amazon: +55 percent.
— Netflix: +106 percent.
The tech-heavy Nasdaq, for its part, gained around 13 percent over the same time.
But the NFLX fairy tale can’t go on forever, unimpeded.
What’s been driving Netflix stock. Unlike fellow FANG member and competitor Amazon, which is constantly entering and exiting business lines, making acquisitions and inventing, Netflix has been driven by essentially one thing for years now: cord-cutting and entertainment-hungry consumers.
Increasingly courting these subscribers with original content, NFLX has kept up impressive levels of subscriber growth for much longer than almost anyone expected.
Obviously, that’s a blessing and a curse. When subscriber growth disappoints, you can get rapid, one-day drops of $50 or more in the stock price.
It’s not just the success of Netflix originals like “Stranger Things,” “House of Cards” and “Narcos” that’s driven the steady subscriber growth. It’s the fact that the Los Gatos, California-based streaming giant is looking to court viewers overseas.
A year ago, NFLX had 52 million international subscribers and its overseas business was losing money. In Q2 2018, Netflix boasted 72.76 million international members, making a tidy $298 million profit on them.
The fact that Wall Street loves CEO Reed Hastings, and is particularly enamored with subscription-centered businesses right now has also helped the NFLX stock price rocket higher over the last year.
But on Wall Street, fast to rise is almost always fast to fall.
NFLX: Major challenges and risks. Netflix carved out its niche many years ago, and built its business as content creators were slow to recognize the existential threat that NFLX began to pose.
But with 130 million subscribers worldwide, those days are long gone.
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The next 10 years won’t be nearly as easy. Competition is coming out of the woodwork. Notably, Walt Disney Co. ( DIS) is removing some of its most compelling content from Netflix and launching its own streaming service. Others may follow.
Disney aside, Amazon Prime Video, Hulu, YouTube, and a more ambitious, AT&T ( T)-owned HBO are all devoting serious time and money to cater to consumer dollars and attention. This also heats up the bidding wars for good content: Netflix will likely spend between $7.5 billion and $8 billion on content in 2018.
That number will only rise in the coming years.
Debt and valuation. “Netflix continues to amass significant debt in striving to build content that’s unique, fresh and entertaining,” says Haris Anwar, senior analyst at Investing.com.
The streaming leader now has $8.4 billion in gross debt and is currently cash flow-negative.
“So far the market has been willing to ignore Netflix’s weighty cash burn, as long as the company continues to beat estimates each quarter while issuing bullish subscriber forecasts,” Anwar says.
That’s an important condition, and the market was unapologetic when Netflix failed to meet subscriber growth numbers in the second quarter. On top of that, the company’s guidance for 5 million net additions in Q3 fell about 1 million short of what analysts expected, compounding the bad news.
Finally, while there is no logic in saying that Netflix stock is not worth buying because it’s been rocketing higher, it is entirely reasonable to ask whether markets got carried away with its valuation.
Trading at 84 times expected 2019 earnings and 13 times sales, investors are placing a lot of confidence in the ability of Netflix to execute perfectly for many years to come, despite the blossoming competition.
Even after its steep drop the stock is conventionally expensive. Mr. Market is signaling that it knows how this movie’s going to end. And that’s precisely when the best writers and directors like to throw in a little twist.
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
Perhaps markets are starting to see that.
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Netflix, Inc. (NFLX) Stock Plunges on Subsciber Whiff originally appeared on usnews.com
