Why Netflix shares go haywire after its latest earnings report

Wall Street is right to ignore a rare shortfall from the streaming king Netflix.

Shares of Netflix (NFLX) soared 13% on Wednesday on the pre-stock market, indicating that the stock will open at an all-time high despite lower profits on Tuesday night. To be sure, the report had plenty of fodder for Netflix’s bulls to take on the roaring bears over the missed earnings.

The company topped 200 million paying subscribers for the first time, fueled by a world that continues to consume large amounts of content at home during the COVID-19 pandemic. Meanwhile, raw numbers for the quarter suggest Netflix hasn’t seen subscribers balk at its latest price hike that hit in October.

Importantly, while Netflix has exceeded subscriber expectations in all major territories, Netflix’s most mature market, US / Canada, reported significantly better than expected at nearly + 900,000 net new subscribers (vs. our expectations of +375,000), which highlights that the ultimate penetration of NFLX services worldwide may be higher than expected, ”said Jeff Wlodarczak, analyst at Pivotal Research Group.

Here’s how Netflix performed during the quarter.

• Net sales: 6.64 billion dollars against 6.63 billion dollars

• Diluted EPS: Estimate of $ 1.19 vs. $ 1.36

• Global Paid Subscriber Additions: 8.51 million against 6.03 million expected

But dig deeper and you’ll see why Wall Street may be more excited about the Netflix story than it has been in some time. The company hit the trio of bullish earnings day indicators.

First, Netflix has guided itself to an operating margin of 25% in the first quarter. This would be a significant step up from the already impressive rate of 14.4% in the fourth quarter. Netflix’s highest operating margin in 2020 was 22.1% in the second quarter. Reading for Wall Street: As expected, the combination of a significantly higher subscriber base paying more for a service leads to bigger profits.

Netflix didn’t stop there, however. He added this nugget in the publication of the results “we believe that we no longer need to raise external funding for our daily operations.” The company also raised its 2021 cash flow forecast by $ 1 billion to break even. Since Netflix’s business model has long required debt to operate, this improved free cash flow outlook is embraced by the bulls.

The story continues

“Netflix has been working on this moment for several years and is now in the unique position of continuing its aggressive content spending while generating significant future cash flow,” said Alex Giaimo, analyst at Jefferies.

The last sweetener of the quarter: Netflix has signaled that it may resume share buybacks soon, as it did from time to time from 2007 to 2011.

Giaimo continued, “While the 4Q subbeat will get most of the attention, we believe the improved free cash flow feedback and future capital independence are the most important positives. .

And you thought “Cobra Kai” was the reason for the Netflix stock craze. Nope.

Yahoo Finance Technical Editor Dan Howley contributed to this story.

Brian Sozzi is an editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.

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