What happened
Investors were pressing the pause button Netflix (NASDAQ: NFLX) today. After the stock rebounded nearly 20% in the past three weeks in anticipation of the second-quarter report, the market thumbed down the report, sending the stock down 6.8% lower at 11:07 am EDT.
And that
Overall, this was another strong quarter for the leading streamer, but a combination of high expectations and weak guidance seemed to suffocate the hot stock.
Image source: Netflix.
There is no doubt that the pandemic and the extra time at home that resulted from it has been a tailwind for Netflix. She added 10.1 million subscribers in the quarter, her best result for a second quarter and well ahead of her own guide of 7.5 million. Revenue increased 24.9% to $ 6.15 billion, above estimates at $ 6.08 billion, and operating profit nearly doubled in the quarter to $ 1.36 billion as operating margin expanded to 22.1% with the profitability helped by a cut in production due to the pandemic. Free cash flow, an old bugaboo for the company, hit $ 899 million, up from a negative $ 594 million last year, although the company expects to return to negative free cash flow next year.
Earnings reported per share were $ 1.59, below the estimates of $ 1.81, but adjusting for $ 339 million in special expenses related to a deferred tax issue and a revaluation of its debt denominated in euros, EPS would have been approximately $ 2.31, well ahead of the consensus.
The company also said that Chief Content Officer Ted Sarandos would join Reed Hastings as co-CEO.
Now what
What really seemed to push the stock down was a guide for the third quarter, which required subscriber additions of just 2.5 million, down from the 6.8 million it added in the third quarter of last year. In the letter to shareholders, management explained: “In the first and second quarter, we saw a significant advance in our underlying adoption that led to tremendous growth in the first half of this year (26 million net additions paid vs. year-over-year). 12 million). As a result, we expect lower growth for the second half of 2020 compared to the previous year. “
A chart in the letter showed that subscribers actually declined slightly in June, though that may be because the company kicked out several downed subscribers from the service for the sake of fairness, since it assumes they are no longer interested in paying for Netflix.
Although the third quarter guidance was disappointing, investors should not take it as a gospel. There is a lot of uncertainty about the COVID-19 pandemic, especially since a resurgence of cases in the US could lift subscriptions in its largest market. Management is likely to be conservative, given record performance in the first half of the year.
