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Whats Got us Talking

The Plunge (And Semi-Recovery) of Netflix

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Netflix knows how to put on a show and get people binge watching them, just this time it’s for the wrong reasons.

 

-14.13%. That how much Netflix’s share price flew in aftermarket trading last night. The plummet comes after Netflix released a disappointing Q2 earnings report. We combed through the report ourselves, and found it to be a very satisfactory report with Netflix meeting all but one of their projections. However the one they missed, might be the most important; and they missed it by a lot. 1 million to be exact. Netflix failed to reach their subscriber growth projection by 1 million whole subscribers, a bigger miss than a toddler attempting a half court basketball shot.

Netflix share performance after Q2 Earnings report

This quarter, Netflix had a projected subscriber growth number of 6.2 million, however they fell short with an actual subscriber growth of 5.2 million. This is Growth that matches their 2017 Q2 growth, and also represents the 2nd straight quarter of slowing subscriber growth. Q4 2017 presented a growth of 8.33 while the following quarter reported growth of only 7.41. So a few questions arise, what do these earnings mean for Netflix and it’s stock? And are these repeating growth slow downs a trend or an anomaly?

We think that while this subscriber blip is concerning, it doesn’t change the overall story if your a Netflix bull. The growth is still off the charts, but with such a high valuation and multiple, trading at over 135x estimated earnings, this stock was due for and requires a large correction to make the multiple somewhat palatable. Although they trade at a modest 23x cash flow, the high content spending is necessary to keep their business growing. Some could point to events such as the World Cup, or just one bad quarter for reasons for this blip, but with companies like Amazon and the potential of Disney and Hulu entering the market long term, we would be cautious of this high flyer.

We think the future of Netflix is bright, with still a long runway for growth internationally and with price increases, but in this point in the cycle, we think it’s still in bubble territory. While we love the Netflix product and will be a long term customer, we feel this drop should be looked at more with caution, rather than a BTD (buy the dip) opportunity.