It seems like only yesterday that Wall Street was fawning over Netflix’s Q1 results, but it seems as though the tables have turned in Q2
There’s no sugarcoating it: the stock market is turbulent right now. After months of the tech-heavy Nasdaq (NASDAQ: QQQ) steaming ahead of its fellow indexes, it has pulled back in the last week, with the Dow Jones (NYSEARCA: DIA) taking a leading role, and the S&P 500 (NYSEARCA: VOO) just kind of tagging along for the ride.
Much of the Nasdaq’s recent growth came from the likes of Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), and other Big Tech stocks, while at-home winners Zoom (NASDAQ: ZM), Peloton (NASDAQ: PTON), and, of course, Netflix (NASDAQ: NFLX) drove its massive gains. After gaining 15 million new subscribers and reporting revenue growth of 27.6%, Reed Hastings’ streaming giant was on top of the world going into Q2. Now, however, investors are less than satisfied with its Q2 showing, sending its share price tumbling after hours.
How did Netflix do in Q2?
Much like its top show, ‘Stranger Things’, Netflix’s earnings report left me, an investor, somewhat satisfied but a little bit uncomfortable. When you scan the streaming giant’s performance and see revenue of $6.15 billion and an additional 10.09 million subscribers you think: “hmm, not too bad at all.” But the company’s wide miss on EPS of $1.59 versus the $1.81 expected leaves a sour taste in the mouth. That, coupled with some pretty glum guidance for the current quarter, where CEO Reed Hastings commented that “growth is slowing as consumers get through the initial shock of Covid”.
It’s not something that investors have become accustomed to of late, with Netflix adding 26 million subscribers YTD — they only added 29 million in all of 2019. This COVID-related boom has helped the company’s stock price soar 60% YTD, but that all appears to be coming to an end as shares fell as much as 10% after-hours following the report.
However, it is important to note that this was the year that many analysts anticipated to be Netflix’s reckoning. Apple (NASDAQ: AAPL), AT&T (NYSE: T), and Disney (NYSE: DIS) launched their rival streaming services, with Disney+ racking up 50 million subscribers already as of the end of Q1. Despite this, nobody is really challenging Netflix’s crown right now. Even Comcast’s (NASDAQ: CMCSA) NBC Peacock service, which was released this week, has not set the world alight just yet. Needless to say, Netflix still had a winning quarter.
How is Netflix’s Q3 guidance?
This is where things get rocky for Netflix! It offered revenue guidance of $6.33 billion, below analyst estimates of $6.4 billion, while the company expects 2.5 million net subscriber additions in Q3 versus 5.4 million predicted. This is an unexpectedly pessimistic outlook from Netflix, especially as it looks like more lockdowns could be ahead of us, with California closing down last week once more.
More concerns are coming from the company’s admission that it must push back productions on original content in the first half of 2021 due to the virus outlook. This stressed me out more than anything as I already feel like I’ve waited long enough for season 2 of ‘The Witcher’…
However, there has been a shakeup at the very top which could mark a clear succession plan moving forward. The company announced that Chief Content Officer Ted Sarandos will become co-CEO alongside current CEO Reed Hastings. Although Hastings has made it clear that he will not be leaving any time soon, perhaps it is in anticipation of him stepping into a more advisory or creative role at the company and allowing Sarandos to take the reins.
Should I still invest in Netflix?
In short: absolutely. I am already anticipating buying shares today at a discounted price when the market opens. The Silicon Valley-based firm is still miles ahead of the competition, largely due to its first-mover advantage in the streaming arena — which it essentially invented. Its brand loyalty has been compounded in recent years by its increasingly busy pipeline of quality original content, and should production be affected by the coronavirus, it is in the same position as its competition.
Morgan Stanley (NYSE: MS) has been particularly bullish on the company, stating that they expect the company to add its 200 millionth subscriber in 2020, and I believe them. With revenue still increasing at a steady pace, a fresh face at the helm, and plenty of content in store, virus or not, Netflix isn’t slowing down. All of this COVID-related subscriber growth has been baked into Netflix’s price up until now, that’s why it rocketed so much YTD. Now, with lockdowns apparently easing, Netflix stock might fall back to a more reasonable price which could be a good time to buy
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.