Is Netflix, Inc. Doomed?
Netflix, Inc. (NASDAQ:NFLX) stock got killed on Wednesday, falling about 10% for the day. That’s enough to give most investors a heart attack. The problem with NFLX stock is that when expectations are so high, even the slightest bit of bad news can trigger a sell-off. That’s exactly what happened with NFLX stock on Wednesday. And no wonder—the NFLX stock price is 93 times (X) the company’s forward earnings and 344X its trailing earnings.
Can NFLX stock recover?
Netflix actually had a stellar quarter. The online streaming giant beat expectations on the all-important subscriber growth number and on earnings.
Netflix added 6.74 million new subscribers to bring its total to 81.5 million global members. Although most of that growth is from international subscribers, that is 31% more subscribers than a year ago. The company said that 42% of its members now reside outside the U.S.
As for revenue, it increased 30% to $1.8 billion, while earnings increased by 20% to $0.06 a share.
All of this sounds really good, so what the heck happened to cause NFLX stock to plummet?
Well, investors love to focus on subscriber growth and unfortunately for NFLX stock, the company’s projected growth is well below estimates. Netflix said that it will likely add two million new international subscribers in the next quarter, when most analysts were expecting 3.45 million. That’s about 40% less than what analysts hoped for.
Netflix explained on its earnings call that the reason for the sluggish international growth is that the roll out of the service hasn’t gone according to plan in some countries. Regardless of the reason, the number has strengthened fears that Netflix’s growth is slowing down.
And that fear makes sense. Netflix is now available in almost every country except China. There really isn’t anywhere else to grow members.
But that doesn’t mean Netflix is going to stop adding members; it’s just doing it at a slower pace than in the past. And when you have a sky-high price-to-earnings (P/E) ratio, investors don’t want to hear the words “slow down.”
Wednesday’s drop in the NFLX stock price sounds like a big deal, but it’s actually not. Investors’ expectations for Netflix stock have been so high over the last few years that it has made the stock highly volatile, especially after earnings.
According to research from Bespoke Investment Group, Netflix has averaged a move up or down of 13.8% throughout its history as a public company after earnings. So yesterday’s move in price actually seems a bit tame compared to the norm and it’s far from the stock’s largest drop, when Netflix stock crashed more than 20% after the company reported its 3Q14 earnings. (Source: “Netflix’s ‘violent’ 12% drop probably isn’t a big deal,” Business Insider, April 19, 2016.)
The Netflix story is similar to Facebook Inc’s (NASDAQ:FB) story. A few years ago, FB stock frequently sold off following earnings. Facebook investors, just like Netflix investors, were focused on growth in monthly active users (MAUs). Whenever Facebook’s MAU numbers didn’t reach the growth heights investors were expecting, the stock got pummeled.
Investors failed to see that Facebook’s margins were improving and that the company was finding other ways to monetize its users rather than just growing them. While growth in users slowed down, Facebook still grew. Oh, and FB stock’s P/E ratio has always been sky-high.
There’s also still a lot to like about NFLX stock, which should drive its price back upward before long. Sure, the company is starting to face stiff competition, particularly from Amazon.com, Inc. (NASDAQ:AMZN), which just launched its “Prime Video” service as a standalone offering. However, Netflix is still the leader in the online streaming video field. Its content library is above and beyond its competitors’ and no other service has the sheer number of members that Netflix has. Not to mention Netflix also has the best technology behind its service to ensure that video is delivered smoothly and of the highest quality, whether you are watching on a TV or on a mobile device.
The Bottom Line on NFLX Stock
According to BTIG analyst Richard Greenfield, Netflix will have 127 million global subscribers by the end of 2018 and 150 million by 2020. (Source: “Netflix, Inc. Up On Positive Analysts Reports Ahead Of Earnings,” ValueWalk.com, April 14, 2016.) That sounds high, especially given yesterday’s numbers, but Netflix just expanded into 130 additional countries in 2015, so the company is just getting started in those markets.
Sure, NFLX stock was hammered on Wednesday, but that should come as no surprise to long-term shareholders. Although Netflix subscriber additions are growing at a slower pace than analysts prefer, they’re still growing at a high pace and that should bode well for NFLX stock over the long term.