On the surface, the latest Netflix, Inc. (NASDAQ:NFLX) earnings report was encouraging. The streaming-video giant walloped analyst estimates on subscriber growth, grew sales by 30%, and narrowly beat top-line estimates. Dig deeper, though, and you’ll see some hidden bits that have put a bit of a dent in NFLX stock.
Netflix shares are down more than 3% in the 10 days since the third-quarter report. That alone isn’t cause for concern in the midst of a market that is suddenly encountering a bit of turbulence across the board. Still, the earnings report flashed three early warnings that could weigh down Netflix stock in the coming months.
NFLX Earnings Warning Sign #1: Disappointing Subscriber Guidance
Though Netflix’s latest price hike (to $11 a month, up from $10) didn’t slow Q3 subscriber growth in the third quarter, it looks like it could start to become a drag in the fourth. The company expects to add a mere 1.25 million U.S. subs in the current quarter, well below the 1.63 million analysts have forecast.
NFLX Earnings Warning Sign #2: Too Much Original Programming?
Original programming at Netflix started as a slow drip, with award-winning shows like House of Cards and Unbreakable Kimmy Schmidt. It’s now a full-on geyser, with seemingly dozens of new, original, Netflix-produced shows popping up every time I sign in. The company doesn’t plan to turn off the tap anytime soon: it has $17 billion in future commitments to original programming over the next few years, including a $7 billion-$8 billion investment in 2018 alone.
With just over $2 billion of cash in its coffers, Netflix may need to raise prices even more to fund its aggressive spending on original shows and movies. And that could further slow its U.S. growth, and possibly turn off investors.
Source: Statista
NFLX Earnings Warning Sign #3: EPS Miss
While subscriber growth and sales numbers outpaced analyst expectations, earnings came up short. On a GAAP basis, Netflix earned 29 cents a share in Q3, shy of the 32 cents Wall Street had anticipated. It’s the third-straight quarter that the company’s bottom-line numbers have either missed or only matched analyst estimates.
Inevitable NFLX Stock Pullback
Add in the fact that Netflix stock was trading at new record highs when Q3 earnings were released, and it’s easy to see why some investors have sold out of their positions. Despite the mild sell-off, NFLX shares are still up nearly 60% in 2017, and have nearly doubled in the last 12 months.
Given those returns, it’s normal for a stock to go through a natural short-term pullback. With slowing U.S. growth and debt sure to pile up due to the accelerated spending, I’d expect things to get worse for NFLX before they get better.
If you don’t already own Netflix stock and have been on the fence about whether to buy, I’d wait a few weeks—or perhaps months. The stock was grossly overvalued by traditional measures (nearly 100 times forward earnings estimates), so a pullback of some sort seemed inevitable.
If the correction deepens, it probably won’t last long. Despite the earnings red flags, NFLX remains a strong long-term growth play.
And the relatively disappointing NFLX earnings report could simply create a better buying opportunity.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
