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Netflix Falls on Q2 Earnings Miss, Subscriber Guidance

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Netflix stock fell about 10 percent in extended trading on Thursday. The company reported mixed second-quarter earnings results. Although the sales beat analysts’ expectations, the company’s earnings were below the estimates. The upbeat sales were driven by better-than-expected customer numbers in the quarter.

Netflix’s Q2 earnings

In the second quarter, Netflix reported an adjusted EPS of $1.59 compared to $0.60 in the second quarter of 2019. The adjusted earnings missed analysts’ consensus estimate of $1.81 per share. Netflix generated sales of $6.15 billion—a growth of 24.9 percent from the second quarter of 2019. The company beat analysts’ consensus sales estimate of $6.08 billion.

Netflix reported a sharp jump in paid customer additions in the second quarter. The global paid net customer additions were 10.09 million in the second quarter. The global paid net customer additions were higher than the forecast of 8.26 million as well as 2.70 million in the same quarter last year. Netflix’s global paid customer base reached nearly 192.95 million at the end of the second quarter. The significant jump in net customer additions is due to a rise in the demand for video streaming services. People had to stay at home amid the coronavirus outbreak.

In the second-quarter shareholder letter, Netflix said that “growth is slowing as consumers get through the initial shock of Covid and social restrictions. Our paid net additions for the month of June also included the subscriptions we cancelled for the small percentage of members who had not used the service recently.”

Currently, Netflix faces competition from Apple, Disney, AT&T’s WarnerMedia, and Comcast’s NBCUniversal subscription-based streaming platforms. In the second-quarter shareholder letter, Netflix said, “TikTok’s growth is astounding, showing the fluidity of internet entertainment. Instead of worrying about all these competitors, we continue to stick to our strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market.”

Netflix’s outlook

For the third quarter, Netflix expects an adjusted EPS of $2.09 on sales of $6.33 billion. Wall Street analysts expected an adjusted EPS of $2.01 on sales of $6.4 billion.

Netflix expects to add 2.5 million net customers in the third quarter, while analysts expect 5.27 million. The global paid net subscriber additions were 6.8 million in the third quarter of 2019.

Analysts expect the adjusted EPS to grow by 41.5%percent YoY (year-over-year) to $2.08 in the third quarter. The adjusted EPS will likely rise by 55.7 percent YoY in 2020 to $6.43. Analysts expect Netflix’s revenues to grow by 21.5 percent YoY to $6.37 billion in the third quarter. The sales will likely rise by 23.3 percent YoY in 2020 to $24.9 billion.

Analysts’ recommendations and target price

Based on Reuters data, around 42 analysts track Netflix stock. Among the analysts, 25 recommend a buy, 12 recommend a hold, and five recommend a sell. Analysts’ mean target price for the stock is $490.92, which implies a potential downside of 6.9 percent based on its last closing price.

Many analysts changed their target prices for Netflix stock after its second-quarter earnings report.

  • Guggenheim increased its target price from $500 to $530.
  • RBC increased its target price from $500 to $610.
  • J.P. Morgan increased its target price from $535 to $625.
  • Piper Sandler increased its target price from $500 to $534.
  • Cowen and Company increased its target price from $535 to $550.
  • Jefferies increased its target price from $520 to $550.
  • Pivotal Research increased its target price from $580 to $600.
  • Credit Suisse downgraded the stock from outperform to neutral and decreased its target price from $550 to $525.
  • Wells Fargo increased its target price from $460 to $470.
  • SunTrust increased its target price from $475 to $530.
  • Goldman Sachs decreased its target price from $670 to $600.
  • Deutsche Bank increased its target price from $500 to $525.
  • Rosenblatt Securities decreased its target price from $440 to $400.
  • UBS decreased its target price from $535 to $500.
  • Oppenheimer increased its target price from $480 to $515.
  • Bernstein increased its target price from $504 to $573.

Stock returns

On Thursday, Netflix stock rose by 0.8 percent and closed at $527.39. The stock was trading 8.3 percent below its 52-week high of $575.37. The stock was trading 109.1 percent above its 52-week low of $252.28. At the closing price on Thursday, Netflix stock had a market capitalization of $231.9 billion.

Based on the closing price on Thursday, Netflix stock was trading 8.5 percent above its 20-day moving average of $485.86. The stock is also trading 16.3 percent above its 50-day moving average of $453.30 and 26.7 percent above its 100-day moving average of $416.37. Netflix’s 14-day relative strength index number is 67. The number suggests that the stock is nearing the overbought levels.

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