Why Netflix Shares Are Down Despite Blowing Away Subscriber Estimates

Netflix delivered a home run on new subscribers last quarter. And yet the response from investors on Wednesday appeared to be a collective: “Meh.” 

Netflix  (NFLX) - Get Report shares slid into negative territory and were down 2.9% to $421.32, after an initial spike on Tuesday after-hours. That was after the streaming giant more than doubled its previous guidance on new subscriber growth for the March quarter, reporting 15.77 million new paying members — its strongest quarter ever by that metric. 

In a note on Wednesday, Needham analyst Laura Martin explained why investors shrugged off Netflix’s results. 

“How many growth stocks can you think of where reported subs are double the consensus estimate and yet the shares don’t move after-hours? We can’t think of many,” Martin wrote. “This implies to us that NFLX’s 20% run-up into earnings last night had already captured 100% of the ‘perfect-storm best case’ for NFLX.”

Expectations for Netflix were high going into March quarter earnings, with the company viewed as a key beneficiary of the coronavirus pandemic and shares up around 30% year to date.

The stock’s performance on Tuesday suggests that growth seekers are looking elsewhere — and that investors are taking a closer look at downside risks on the horizon, Martin said.  

In a letter to shareholders, Netflix management laid out the positive and negative impacts from the coronavirus pandemic. The potential negatives, it said, include an inevitable drop-off on new subscribers when the pandemic ends, slowing content production and lower international revenue because of foreign currency impacts. 

On Wednesday, Netflix announced that it planned to raise $1 billion in debt that it will use for “general business purposes, which may include content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions.” Netflix had $14.17 billion in debt at the end of March. 

The streaming giant also cautioned on Wednesday that its subscriber growth is certain to decelerate after the temporary coronavirus-driven bump. It added that there may be a “pull-forward” effect, whereby new customers that would have signed up for Netflix later in the year are choosing to do so now. 

“Does this imply negative sub growth for several quarters in a row after COVID ends? Historically, NFLX has been very volatile to the downside whenever subs decline,” Martin noted. 

In prior quarters where Netflix reported weak or negative sub growth — as was the case last July, when it lost U.S. subscribers and the stock hit the skids for weeks. 

Netflix’s second quarter performance is likely to be closely scrutinized by investors as a sign of the broader impact of the coronavirus. 

For the current quarter, Netflix guided for 7.5 million new paying subscribers, above Wall Street’s forecast of 4.14 million — while also cautioning that guidance is mostly “guesswork.” 

“The actual Q2 numbers could end up well below or well above that, depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown,” the company said.  

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