Netflix was trading lower following its less-than-impressive Q3 earnings release after the market closed yesterday. This is the second consecutive quarter when the stock has fallen after the company's earnings announcement. Let's look at some key takeaways from Netflix’s earnings call, and analyze why the stock fell after the earnings release.
Netflix released its earnings yesterday
Netflix released its third-quarter earnings yesterday at 4:00 p.m. ET. Its revenue of $6.44 billion was slightly higher than what Refinitiv-polled analysts were expecting. However, its EPS of $1.74 were way below their $2.14 forecast.
Highlights of Netflix’s third-quarter earnings report
Netflix added net 2.20 million new paying subscribers in the third quarter. The company warned during its second-quarter earnings call that the growth in the second half of the year may not be as stellar as in the first half. However, the metric was still below the 3.57 million that analysts were expecting. Also, the company expects to add about 6 million new subscribers in the fourth quarter, a sharp reduction from the 8.8 billion it added in the fourth quarter of 2019.
Netflix vice president of investor relations Spencer Wang, downplaying the lower new subscriber count, said, “We just really don’t over-focus on any 90-day period.” He added, “And just to give you an example, if the quarter was 48 hours longer, we would have come in slightly above our guidance forecast.”
Netflix's free cash flow was positive in the third quarter. It has now posted positive free cash flow for three consecutive quarters, partially because of the restrictions on new production due to the COVID-19 pandemic. It expects to burn cash in the fourth quarter as production resumes. For 2021, it expects its cash flow to be between breakeven and -$1 billion.
Netflix stock price could fall today
Considering Netflix stock's price last night, it looks set to open lower today. The stock was trading more than 5 percent lower at $495.40 after the market closed yesterday. NFLX is up 64 percent this year, as investors have poured money into "stay at home stocks" during the coronavirus pandemic, lifting the stocks' valuation.
To justify its valuation, Netflix needs to report strong growth, which wasn't the case in the third quarter. Its disappointing new subscriber count and weak forecast for the fourth quarter dampened investor sentiment and triggered a sell-off in Netflix stock after the company's earnings release.
Analysts turned bullish on Netflix before the earnings release
This month, several brokerages, including Morgan Stanley, Cowen, KeyBank, and Pivotal Research, raised Netflix’s target price ahead of its earnings release. Goldman Sachs raised its target price by $70 to $670, which is the highest price target for Netflix. Goldman expected Netflix to report better earnings in the third quarter. Now, with Netflix’s Q3 report out, analysts’ bullishness doesn’t seem to have played out well.