Netflix (NASDAQ:NFLX) is being beat like a drum after reporting its second-quarter earnings results. Expectations were high going into the report, given that shares have more than doubled so far this year. While Netflix earnings came in ahead of estimates, revenue missed the mark.
Earnings of 85 cents a share beat estimates looking for 79 cents. However, the $3.91 billion in sales missed estimates of $3.94 billion. That’s a no-no for a momentum stock like Netflix. However, the company’s subscriber result is the real culprit here. The streaming giant added “just” 5.15 million subscribers during the quarter, well short of its prior guide of 6.2 million and analysts’ estimates of 6.27 million.
Wow, what happened there? That’s surely something management will address during the conference call. Depending on how they handle it will likely determine whether the initial 8% after-hours selloff is just the start of a larger selloff, or if it’s an attractive buying opportunity.
While the conference call can change investor sentiment, along with more volume in the upcoming regular-hours trading session, this shortcoming will be hard to shake off. Investors can shrug off a revenue miss, but a subscriber miss this big will be hard to ignore.
Trading Netflix Earnings
Earnings are one of the most difficult events to trade. Even good results can have a poor reaction depending on how the stock has performed leading up to it. As of Monday’s close, Netflix stock was up almost 30% over the past three months.
That’s a massive gain for any company, let alone one that is now up 108% so far in 2018. On that basis, it was hard to buy shares ahead of Netflix earnings results. That said, shares did pullback in the days leading up to the report, falling from roughly $420 to $400. Surprisingly, that made it even trickier, because despite the pullback, NFLX was still sporting lofty gains.
So what now?
The initial after-hours move has Netflix trading near $368. It has essentially knocked the stock down to its 50-day moving average. However, short of management talking their way out of this big subscriber miss, I would be leery of this level holding.
If it does hold, the 50-day test will be a success. That said, I wouldn’t rule out the $330 to $340 level being hit. That’s where NFLX’s 100-day moving average is, as well as a previous breakout level. Assuming the losses stick, investors’ best bet might be to let the stock settle for a few days and see how it looks then.
Evaluating Netflix Earnings
Investors couldn’t value Netflix with traditional metrics, as its story has never been about earnings or free-cash flow. By the way, the latter of those two figures came in negative (as expected), more than $500 million below breakeven. Netflix is spending roughly 50% of its revenue on content this year and isn’t putting the brakes on anytime soon.
No, this isn’t a profit story or even a revenue story right now. It’s all about subscribers. NFLX has crushed this metric for the last four quarters, leading to its meteoric rise. It’s what allowed it to pass Walt Disney Co (NYSE:DIS) in market cap and made it one of the most captivating FANG stocks.
For the second-quarter, Netflix added just 670,000 new subscribers in the U.S., below its prior guide of 1.2 million. Internationally, its 4.47 million subscribers added came up short of its guide for 5 million.
One bad quarter of subscriber growth can be overlooked, but its third-quarter guide has investors really hitting the “sell” button. The company expects to add 5 million total subscribers (domestic and international), 1 million short of analysts’ estimates and less than its second-quarter results.
So what’s the takeaway here? The market isn’t going to like Netflix earnings report and as of now anyway, the stock appears to have lost its mojo. Investors looking for a long-term buying opportunity may find this as their chance, but let’s allow the dust to settle first and see where support comes into play. I want to see how it trades on Tuesday as well. It will also be interesting to see if investors start to migrate back to DIS stock.
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