Netflix, Inc. (NASDAQ:NFLX) did what it had to do Monday evening in its second-quarter earnings report: grow subscribers. A major beat in customer count will overshadow a more modest beat on revenue (and a minor miss in earnings). NFLX stock is up 8% in after-hours trading — and could gain even more in regular trading on Tuesday.
After all, subscribers traditionally have been the key driver behind Netflix shares. And given the good news on that front, investors likely will be rushing in to buy NFLX on the heels of Q2’s encouraging report.
Subscribers and Netflix
As I wrote last week ahead of earnings, historically subscriber count has been the key driver for Netflix stock. If that holds true coming out of Netflix’s second-quarter earnings report, NFLX stock should get a nice lift in the weeks ahead.
In its Q1 shareholder letter, Netflix had guided for 3.2 million net additions. That included 600,000 U.S. subscribers, and 2.6 million new customers overseas. But the company actually added 750,000 domestic customers — a 25% beat — and topped its international estimates by over 1 million, adding 3.65 million on a net basis.
That in turn led to a solid revenue beat, with sales of $2.79 billion ahead of consensus expectations for $2.76 billion. Earnings of 15 cents per share did miss expectations by a penny — likely not enough to change the narrative given the long-term focus on NFLX stock.
What will change the narrative in the near-term is the impressive subscriber numbers.
The total addition of 5.2 million members means that Netflix — a 20-year-old company — grew its base by more than 5% in a single quarter. The international subscriber base now exceeds that of its U.S. counterpart, but provides a much lower revenue contribution. No doubt the continued possibility for international growth and the margin-enhancing ability to raise prices overseas will become a part of the Netflix growth story coming out of Q2.
That should imply additional improvement for shares down the road.
The Bears Are Growling Over NFLX Stock
Netflix remains rather heavily shorted for a stock of its size; more than 6% of its float is sold short.
The bears likely will see the quarter as confirming their thesis, too.
As impressive as subscriber growth was, Netflix paid dearly for it. Adjusted EBITDA declined 32% year-over-year, as margins continued to be pressured by increased marketing and other spend. Free cash flow was negative $608 million, as the company stays on pace to burn at least $2 billion in cash for the full year. The international business remains profit-negative, despite clearing the $1 billion mark in revenue in Q1.
Even the subscriber numbers weren’t perfect. Netflix management itself wrote in the shareholder letter that it was possible that subscribers had been pulled forward from Q3. In that context, however, guidance for another 4.4 million net adds in the quarter (3.65 million from overseas) seems rather solid.
It may not be enough to win over the bears. But Netflix shorts have been run over for some time now — and Q2 seems likely to squeeze those shorts even further. Rightly or wrongly, NFLX stock continues to trade based on subscriber numbers.
Those numbers were hugely impressive in Q2. And that will be more than enough to send Netflix shares soaring.
As of this writing, Vince Martin has no positions in any stocks mentioned.