Why Netflix is Down 20% Post Earnings


Why Netflix is Down 20% Post Earnings

Netflix, Inc. (NASDAQ:NFLX) shares lost 20 percent after the company declared its results for the second quarter, which ended June 30.

The company reported earnings that beat market estimates – it made $6 million, or about 11 cents per share against an estimate of 4 cents a share by analysts. Revenues for the quarter were $889 million and in line with estimates of $889.6 million.

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Yes, the performance was poor, if benchmarked against the previous year, which saw earnings of $1.26 on revenues of $788.6 million. It seems the company is still paying the price for its major pricing goof-up in the summer of last year, and its abortive DVD spin-off bid.

Coming back to why investors flung the stock into the dumpster after the results were announced. As usual it has to do with the stock market’s fixation with future prospects.

Chief Executive, Reed Hastings, and CFO, David Wells, effectively put a hold on Netflix’s nth recovery after announcing the likelihood of the company recording losses, due to more international expansions. “We will launch our next international market (in the fourth quarter), which will drive us temporarily back into the red.” The company also said the Olympics could adversely affect viewing and new subscriber sign-ups.

Worse, the company also warned that its goal of reaching 7 million new streaming subscribers may be “challenging” unless it manages to add about 1.8 million new streaming subscribers in the third quarter. Analysts are of the view that the target is lofty, even if it does add that many in the current quarter.

Is the market being unduly pessimistic on the outlook for the company? Does a 20% crack in the price offer value?

Let’s not forget some plus points of this streaming pioneer.

First, it has a great slate of new offerings coming up – including Best Picture Oscar winners, “The King’s Speech” and “The Artist,” as well as this year’s blockbuster “The Hunger Games” and the original series “House of Cards”, and the return of “Arrested Development.”

Secondly, the company has done a great job of growing its market share in online movies from a lowly 0.5% in 2010, to 44% this year, as per HIS iSuppli. This shows it could play a very big role, as more and more consumers take to the convenience of on-demand video.