Netflix Stock Is Getting Crushed, but There May Be Reasons for Optimism
Streaming video giant Netflix (NFLX) - Get Report disappointed investors in a big way with its second-quarter results on Monday, but some analysts argue the worst may be over.
The digital content company posted $2.1 billion in revenue with earnings per share of 9 cents, compared to consensus expectations of $2.11 billion in revenue and 2 cents of EPS.
While the figures were in line with estimates, Netflix's subscriber numbers were killing the stock on Tuesday. Netflix said it added just 1.7 million net new subscribers in the second quarter, way below both the 2.5 million it had been expecting and the 3.3 million the media company added over the corresponding period a year ago. Of that 1.7 million, 160,000 were in the U.S. and 1.5 million were foreign.
The stock was trading down about 14% late Tuesday morning to $85.02, and is down 26% for the year.
Netflix cited its "un-grandfathering" price increase as the main driver for the disappointing subscriber growth. The company announced earlier this year that all standard service subscribers would start paying $9.99 per month. The company had previously raised its fee from $7.99, but allowed existing customers to keep that rate until now.
"We think it's hard to rule out market-maturation, competition and less-than-perfect execution as factors as well," wrote RBC Capital Markets Mark Mahaney in a Tuesday note.
Jim Cramer, TheStreet's founder and manager of the Action Alerts PLUS portfolio, said he was concerned by Netflix's results and not convinced by the company's explanation for why U.S. subscriber growth was so slow.
"I was just baffled," Cramer said. "When I see a big decline that tends to mean that large institutions are trying to get out," he said.
For the third quarter, Netflix said it's expecting just 300,000 U.S. customer additions due to the ongoing transition to higher prices and the broadcast of the Summer Olympics, which could discourage new sign-ups.
But RBC's Mahaney argued that Netflix should be able to survive the consequences of the price hike and the Summer Olympics, given several positive factors on the horizon.
Those factors include its recently-announced deal to be distributed on Comcast's (CMCSA) - Get Report new software platform; the major content expansion via both its deal with Walt Disney (DIS) - Get Report and its continuing investment in original content; and a strong growth path overseas as demonstrated by Netflix's dominant market share in North America, Latin America and Western Europe. Mahaney believes Netflix still has the potential to see its shares double over the next three years.
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Pacific Crest Securities analyst Andy Hargreaves agreed with Mahaney's positive assessment, explaining that despite the weak Q2 and Q3 guidance, Netflix remains an attractive investment opportunity given its long-term competitive advantages in monetizing content.
"Best thing about Q2 results and Q3 guidance is that they are behind us," Hargreaves said, noting that Netflix is simply going through higher-than-expected churn related to the price increase.
While the price hike isn't going as smoothly as the content company had hopped, Hargreaves said the fact that the pace of gross subscriber additions has been stable, according to Netflix, indicate that improvements in content have been successful in attracting new customers.
"This suggests that the model is still working, and that incremental churn is likely to be largely one-time in nature rather than an ongoing headwind," he added. Hargreaves increased his price target on Netflix from $125 to $130.