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The shares of Netflix (NASDAQ: NFLX) plunged up to 14% on Tuesday, before recovering to end the day with a more modest loss of 5%. A second quarter earnings report that did not meet investors' high expectations was responsible for the loss.
As the Netflix management noted, the second quarter was "strong but not exceptional". Yet with Netflix stock trades greater than 80 times earnings forecast for 2019, good results may not be enough to keep the stock in value – nothing short of extraordinary.
Netflix's second quarter earnings report suggests some signs that this growth will be harder to come in the future. However, other aspects of the report imply that the company is only scratching the surface of its profit potential. Thus, Netflix should remain a battlefield for the foreseeable future
Lack of subscriber growth
Three months ago, Netflix estimated that it would add 6.2 million subscribers to the broadcast world in the second quarter: 1.2 million the United States and 5.0 million in the rest of the world. Instead, its total number of subscribers increased by only 5.15 million. The deficit has been distributed between national and international markets. Netflix has added 670,000 streaming subscribers in the US and 4.47 million streaming subscribers in its international markets.
Netflix has for the first time missed its growth forecast of subscribers since the first quarter of 2017 and the first time in two years. A Netflix content screen with the Daredevil series "src =" https://g.foolcdn.com/editorial/images/488221/consumer-goods-streaming-media-netflix-screenshot-nflx_large.jpg "/>
The growth in the number of domestic Netflix subscribers slowed in the last quarter. Image Source: Netflix
Netflix came a lot closer to the other elements of its forecast in the second quarter. He even surpassed his earnings per share forecast of $ 0.06, thanks to a one-time gain of $ 85 million. However, investors focused their attention on subscriber growth.
Increase in marketing spending but slowing growth
The most troubling part of Netflix's second quarter earnings report is domestic growth. Netflix doubled its marketing spend compared to last quarter, continuing a trend since the first quarter. Nevertheless, the growth in the number of subscribers rose from 1.07 million to 670,000.
Management added that 2.63 million streaming subscribers were added again in the first half, against 2.49 million in the first half of 2017. This is uncomfortable given that Netflix has doubled its domestic marketing spend. In addition, the pioneer of video streaming expects a decline of 0.2 million net subscribers in the third quarter.
Despite the slowdown in subscriber growth, Netflix saw a 26% increase in its business figure 32% increase in its contribution profit. This may give the impression that there is no reason to worry.
However, because of the nature of Netflix's business model, it takes a full year for subscriber growth to be fully reflected in revenue growth. In addition, Netflix is benefiting this year from a price increase that it put in place last fall. At the end of the second quarter, the number of subscribers to the domestic market grew by only 10.5%, so that revenue growth could slow significantly in the coming quarters.
International growth and expansion of margins could make a difference
– and the growing amount of marketing expenses needed to withdraw it – may be troubling, but society is still on a roll outside of United States
Although it is below its forecast of international growth in the last quarter, it still adds net subscribers than the previous year. In the last 12 months, the number of international subscribers has increased by more than 20 million (or 40%). This brought its international contribution margin from negative territory to 15.5% in the space of one year.
Netflix's international growth has also indirectly boosted the profitability of the domestic segment, absorbing more of the cost of the original content that is available globally. This is one of the reasons why its domestic contribution margin has increased in the last quarter despite slower growth in subscribers and a significant increase in marketing costs.
Netflix still has a lot of room for improvement outside of the United States. four or five years, allowing further expansion of margins and rapid growth of EPS.
So, what could go wrong? The biggest risk is that the rapid rise in content and marketing costs could prevent Netflix from matching its domestic contribution margin by nearly 40% on its international segment. There would still be a lot of BPA growth in the future – but maybe not enough to justify the high price of stock
