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Netflix Stock Has Fallen despite Posting Solid Q1 Earnings

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Netflix (NASDAQ:NFLX) stock gained about 10% in the extended trading session. However, the stock fell to a 0.5% gain after reporting the first-quarter results. The stock has fallen by over 2% in pre-market trading today as of 8:09 AM ET. Overall, the company provided conservative guidance. Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) will likely release their earnings results on April 29. Walt Disney (NYSE:DIS) will likely release its earnings on May 4.

Although the earnings missed analysts’ consensus estimate, the revenue marginally beat the estimates, which was expected. The upbeat revenues were driven by higher-than-expected subscriber numbers in the quarter. The coronavirus outbreak, which has forced people to stay at home, led more people to subscribe to online streaming services like Netflix.

Netflix’s Q1 performance

Netflix’s revenue was $5.77 billion in the first quarter, which was in line with its guidance. The revenues beat the estimate of $5.76 billion and increased by about 27.6% YoY in the quarter due to higher-than-expected subscriber growth. Currency headwinds dented the company’s first-quarter revenue by $115 million. The company’s ARPU (average revenue per user) also increased 8% YoY on a constant-currency basis.

Netflix reported an EPS of $1.57 in the first quarter. The earnings missed the consensus estimate of $1.65 and management’s guidance of $1.66 per share. The earnings also fell significantly from the EPS of $0.76 in the first quarter last year due to the negative impact of coronavirus. Lower operating margins also weighed on the first-quarter earnings.

Netflix reported an operating margin of 16.6% in the quarter, which was lower than 10.2% in the first quarter last year and the company’s forecast of 18.0%. Netflix incurred incremental content costs in the quarter after its production house closed. Although shutting down the film and TV production temporarily boosted the free cash flow, it could delay some programming by a quarter.

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Higher subscriber growth

Netflix posted a sharp jump in paid subscriber additions in the first quarter. The global paid subscriber additions were 15.77 million in the first quarter. The paid subscriber additions were higher than the forecast of 7.0 million as well as 9.6 million last year. Netflix’s global paid subscriber base reached nearly 182.86 million at the end of the first quarter.

In comparison, Amazon Prime had 150 million members globally at the end of 2019. Apple TV+ had 33.6 million US subscribers in 2019, while Hulu had 31.8 million subscribers. Recently, Disney+ crossed 50 million subscribers globally—up from 26.5 million subscribers at the end of 2019.

Netflix’s outlook for 2020

Netflix’s management understands that the subscriber growth and higher viewing in the first quarter are temporary due to COVID-19. After the lockdown is over, the viewing and subscriber growth will likely decelerate. In a letter to shareholders, the company said, “We expect viewing to decline and membership growth to decelerate as home confinement ends.”

Amid the uncertainty, management can’t predict its subscriber growth in the second quarter. However, Netflix expects to add 7.5 million new customers for the June-ending quarter. The global paid subscriber additions were 2.70 million in the second quarter of 2019 and 15.77 million in the first quarter.

Analysts expect the adjusted EPS to grow over 100% to $1.69 per share in the second quarter. The adjusted EPS will likely rise by 51.3% in 2020 to $6.25 per share. Analysts expect Netflix’s revenues to grow by 22.5% to $6.03 billion in the second quarter. The sales will likely rise by 22.1% in 2020 to $24.6 billion.

Analysts’ recommendations for Netflix stock

Based on Reuters data, around 43 analysts track Netflix stock. Among the analysts 28 recommend a “buy,” nine recommend a “hold,” and six recommend a “sell.” Analysts’ mean target price for the stock is $434.49, which implies a potential upside of 0.15% based on its last closing price.

Netflix stock fell 0.84% and closed at $433.83 on Tuesday. At that price, the stock has a market value of $190.4 billion. The stock has risen 34.1% YTD (year-to-date). In comparison, the S&P 500 has fallen 15.3% YTD.

You can read Goldman Sachs Turns Bullish on Netflix Stock before Earnings and Netflix Stock Broke Out: Should You Add It to Your Portfolio? to learn more.

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