Netflix, Inc. (NFLX) stock is plunging in Tuesday morning trading, as investors didn’t like what they heard in yesterday’s (fairly solid) earnings report. Shares opened the day down around 9%, or roughly a $10-per-share hit — good enough to send Netflix stock below the psychologically meaningful $100 level.
As far as earnings were concerned, they were good, actually, coming in at 6 cents against expectations for just 4 cents.
Subscriber growth was also off-the-walls good: The streaming video on demand leader boasted net subscriber additions of 2.23 million in the U.S. last quarter, easily topping Wall Street’s 1.82 million consensus. Meanwhile, international net subscriber growth also topped estimates, clocking in at 4.51 million, just enough to eke out Wall Street’s 4.49 million projection.
Nothing really to complain about yet, but NFLX bulls probably would’ve preferred international — rather than domestic — sub growth to crush estimates, considering Netflix just flamboyantly charged into 130 countries in Q1.
Don’t worry, there’s plenty for NFLX bulls to hate after Q1’s report.
NFLX Stock Is Practically Begging You to Sell It
Oh, if stocks could talk. What would they say? Netflix shares would tell you that they’re overvalued. That they’re sick of having insane expectations over their heads every quarter; they just want to be a stock for the everyman portfolio.
“Make me a Johnson & Johnson (JNJ),” it might sigh, “I want a dividend.”
I’m sorry, buddy, but that’s a pipe dream. You’re a top-notch growth stock! (Well, maybe not after this quarter.)
These are the five glaring issues with NFLX stock after Monday’s Q1 report:
- Guidance Was Soft: This is probably the largest problem. Netflix forecast Q2 international subscriber growth of just 2 million vs. the 3.45 million Wall Street expected. It only expects 500,000 net U.S. subscriber adds, while the Street was looking for 550,000. Let’s make this very clear: The U.S. market is pretty darn mature, the rest of the world isn’t, that’s where the growth should be, that’s where the spend is going, and that’s where it has to blow people away — soon.
- Amazon Cranks Up the Heat: Amazon.com, Inc. (AMZN) CEO Jeff Bezos isn’t afraid to come off as a cutthroat free market capitalist, because he is. On Sunday, 24 hours before NFLX earnings were to be announced, Amazon announced that its Prime Video SVOD service, previously only available to Amazon Prime members, will also be available to anyone who pays $8.99 per month for it.
- Netflix Is Getting More Expensive: That reminds me: Netflix is also getting more expensive. The “standard” subscription option, which lets you stream in HD and on two screens at the same time, was hiked to $9.99 for new subscribers in October. Although the price for new subscribers was at $7.99 in 2014 and $8.99 last year, people who signed up before those price increases were allowed to keep their old rates. No more: By the end of 2016, no one will be paying less than $9.99 for standard. That may spark some consumer cost-cutting … and perhaps defection to Prime Video.
- Missed on Revenue: NFLX stock clearly has a lot going on right now, but missing on revenue is something you never want to see with a tried-and-true growth stock. Sure, revs were up 24% year-over-year, but $1.96 billion missed the $1.97 billion consensus by a hair … a very expensive hair.
- Absurd Valuation: This one needs little explanation (hopefully). NFLX stock trades, oftentimes, on projections that go two, three or four years out. A stock going for 346 times trailing earnings, 87 times forward earnings, 6.8 times sales and 20 times book? If it could talk, it wouldn’t scream value.
It’s understandable that investors can get carried away with Netflix’s story. It’s a universal platform, infinitely scalable, providing quality entertainment for reasonable prices. But its growth might not be as robust as some had hoped, and in its letter to shareholders it made very clear to expect no meaningful progress in penetrating the Chinese market anytime soon.
I’ve said it before and I’ll say it again: I think NFLX shares are heading to the 70s — and I’m not talking about the era of tie-dyed Volkswagen buses, Watergate and Vietnam.