Billions of people around the world, sheltering at home turned to Netflix to escape the harsh reality of the chaos surrounding them.
While Netflix subscription growth was lower than projected in the second quarter, prompting Wall Street to downgrade the company. Will a second wave will likely create an upturn? Now is a good time to consider picking up some Netflix shares.
Leader of the Pack
Netflix has always been ahead of the curve.
Netflix introduced mail order DVD service to rescue customers from the race to return their videos to Blockbuster before getting hit by overdue fines. Unlike Blockbuster, you could keep your Netflix DVD until you actually viewed it.
As imitators like redbox and Amazon – and briefly Blockbuster — entered the market, Netflix moved into video streaming. When streaming became old hat, it launched House of Cards, an original TV series that swept the competition. The company now produces a wide range of TV shows, realty TV and star-studded movies like The Irishman. The company raised hackles in Hollywood when Netflix original Roma was nominated for an Oscar for Best Picture.
Netflix offers its ad-free, subscription video-on-demand service in more than 190 countries.
Even before the pandemic, Netflix benefited from the cord-cutting trend, with people quitting traditional pay-tv services. The trick was to keep ahead of the pack at its heels – Amazon, Peacock TV, Hulu and Disney – now offering streaming and original content.
Lower Than Expected Subscription Growth
Three months ago, Netflix projected that it would add 2.5 million paying subscribers in the third quarter, compared to 6.77 million in the prior-year period. Management attributed the slowdown in subscriber additions to growth having been pulled forward into March and April (the peak of the shutdown phase in many countries).
Last week, Netflix reported that it actually added just 2.2 million new paid subscribers last quarter. During the earnings call, management said that was a trivial deviation from its guidance.
However, many analysts and investors had thought Netflix was being conservative, so the actual result seemed disappointing. Netflix responded that it strives for accuracy in its predictions – not conservatism. But, Netflix stock fell 7% on Wednesday.
That still left it up more than 50% year to date, so it doesn’t look as if this blip will impact Netflix’s long-term strategy.
Netflix Stock Continues to Rise
In the June quarter, Netflix earned $1.59 a share on sales of $6.15 billion. Analysts had forecast Netflix earnings of $1.81 a share on sales of $6.08 billion. On a year-over-year basis, Netflix earnings jumped 165% while sales rose 25% in the second quarter.
For the September quarter, Netflix forecast earnings of $2.09 a share on sales of $6.33 billion. Analysts are modeling Netflix earnings of $2.12 a share on sales of $6.37 billion in the third quarter. In the year-earlier period, Netflix earnings were $1.47 a share on sales of $5.24 billion.
Netflix Stock Forecast
Looking ahead, Netflix says it expects revenues of $6.57 billion, operating income of $885 million, $615 million in net income, earnings per share of $1.35, and 6.0 million new paid customers in the Q4.
Adam Levine-Weinberg at The Motley Fool points out, “Netflix still has plenty of growth in its future. But that growth is going to come at a slower rate than what investors have experienced over the past five years. Meanwhile, even after falling on Wednesday, Netflix stock trades for about 55 times the company’s projected 2021 earnings.”