Netflix Falls After Earnings: Buying Opportunity?

67 %
33 %
Information about Netflix Falls After Earnings: Buying Opportunity?
Business

Published on July 22, 2014

Author: TheMotleyFool

Source: slideshare.net

Description

International expansion is expensive, but Netflix is making a really smart bet from a long term pint of view. Should you capitalize short-term weakness in Netflix as a buying opportunity?

Netflix Falls After Earnings: Buying Opportunity? Source: Netflix

What’s Going On With Netflix Netflix reported strong growth for the second quarter of 2014. However, earnings guidance for the third quarter came in materially below expectations, as the company is planning to accelerate investments for international expansion. The stock was falling by 5.3% on Tuesday, as investors reacted with pessimism to the news.  However, management seems to be doing the right thing by focusing on long-term growth opportunities as opposed to short- term profit margins. Is the dip in Netflix a buying opportunity for investors?

Healthy Subscriber Growth Netflix added 1.69 million new members during the second quarter, an accelerated growth rate versus 1.24 million new members in the second quarter of 2013. The company added 0.57 million subscribers in the U.S. and 1.12 million members in international markets. Both the U.S. and international markets came in above guidance.  Netflix ended the quarter with 36.24 million U.S. members and 13.8 million international members. This brings the total membership count to more than 50 million. Management is forecasting 3.69 million new members during the third quarter.

Membership Numbers Source: Netflix

Strong Sales Netflix produced $1.34 billion in revenue during the quarter, a 25% increase versus the same quarter in the prior year. The number was above analysts’ forecast of $1.33 billion on average. Domestic sales increased 25% versus the same quarter in the prior year, representing approximately 73% of total streaming revenues during the quarter.  International revenue jumped by a whopping 85%, generating 27% of total streaming revenue during the period versus 20% in the second quarter of 2013. Revenue in the DVD segment fell 16%.

Improving Profitability Total contribution margin jumped to 18.5% versus 10.2% in the second quarter of 2013. Contribution margin in the U.S. came in at 27.1% versus 22.5% in the prior year quarter. Contribution loss in international markets was materially reduced, from a loss of 39.7% to a much smaller negative margin of 5%. Management expects total contribution margin to decline to 16.6% in the third quarter due to increased spending for international growth.

Profitability Numbers Source: Netflix

Disappointing Earnings Earnings per share came in at $1.15 during the quarter, a big increase of 135% versus $0.49 per share in the same quarter of 2013. The number was marginally below analysts’ expectations of $0.16 on average for the quarter. For the third quarter of 2014 management is forecasting earnings per share of $0.89, considerably below forecasts of $1.06 on average for the quarter. Lower-than-expected guidance seems to be the main reason for disappointment among investors.

Accelerating International Expansion Management is very optimistic regarding international demand: “What we’ve seen really is just tremendous adoption of on- demand viewing consumers around the world, whether it’s Argentina, Brazil, Finland, the U.K. -- it’s been really quite consistent.” In September the company will be launching the service in Germany, France, Austria, Switzerland, Belgium, and Luxembourg. This will significantly expand Netflix’s total addressable market to over 180 million broadband households, or double the number of current U.S. broadband households. International expansion is expensive, but it seems to be really worth the effort in terms of growth opportunities.

Strong Pricing Power “In May, we raised prices modestly in most of our markets for new members on our two screens at-a-time HD plan, and introduced a one screen at-a-time, standard definition plan across our markets. Our two screen HD plan continues to be the most popular plan choice for new members. We expect ARPU [Average Revenue Per User] to rise slowly as members at the new prices grow as a percentage of total membership. There was minimal impact on membership growth from this price change.” Source: Netflix letter to shareholders, July 21, 2014.

Successful Content The second season of Orange Is the New Black has been the most watched series in every Netflix territory during its first month. Netflix original series and documentaries received 31 Emmy nominations -- more than double the 14 nominations the company received in its first year of releasing original programming. The company is putting more focus on international markets when it comes to original productions in order to better reflect the increasingly global nature of the Netflix service.

Foolish Takeaway Accelerating international expansion will have a negative impact on profit margins in the medium term. However, considering how encouraging demand has been in international markets, Netflix seems to be clearly making a smart strategic move by betting on global growth. The business is still generating impressive growth rates, both in the U.S. and abroad. Operating profitability is also moving in the right direction when leaving aside investments for growth. Short-term weakness in Netflix may create a buying opportunity for long-term investors.

The $2.2 trillion war for your living room can be a huge opportunity for investors. Do you know how to profit from it?

Add a comment

Related presentations

Boat chandlery

Boat chandlery

October 26, 2014

http://ecommerce-for-business.com/shackles-boats-theboatonlinestore/ We offer a ...

http://vendere-su-internet.com/shackles-for-boats-from-theboatonlinestore/ Moori...

Silver bar!

Silver bar!

October 21, 2014

Pretty similar to gold bars are these silver slabs. Silver is considered as the mo...

Gold coin prices!

Gold coin prices!

October 21, 2014

If you are an investor of gold bars and coins, one of the major things that you ou...

CyberSecurity's social media stats for one week as of Oct 21st 2014

CyberSecurity's social media stats for one week as of Oct 28th 2014

Related pages

Netflix Falls After Earnings: Buying Opportunity? -- The ...

Netflix Falls After Earnings: Buying Opportunity? International expansion is expensive, but Netflix is making a really smart bet from a long ...
Read more

Is Netflix's Fall From Grace A Buying Opportunity?

Is Netflix's Fall From Grace A Buying Opportunity? ... Investors lost some of their confidence in Netflix after the company's ... View upcoming Earnings, ...
Read more

Is Netflix's Fall From Grace A Buying Opportunity? - Yahoo ...

... shares of Netflix ... Fall From Grace A Buying Opportunity? ... in Netflix after the company's most recent earnings report showed ...
Read more

NFLX Stock Quote - Netflix Inc. Stock Price Today (NFLX ...

... earnings and estimates, ... Netflix Inc. NASDAQ: ... Netflix's stock surges 3.5% premarket after Financial Times report of potential Apple ...
Read more

Netflix shares fall after disappointing 2Q outlook - Yahoo

Netflix shares fall after ... Earnings and revenue both ... Morgan Keegan said any dip in share price would be a buying opportunity, ...
Read more

Olson Says Fall in Netflix Shares `Buying Opportunity ...

Olson Says Fall in Netflix Shares `Buying Opportunity' ... Phoenix's Peskind Sees Opportunity in ... Netflix (NFLX) After Hours Earnings Drop ...
Read more

Netflix, Inc. (NFLX) Earnings Report Date - NASDAQ.com

Find the latest earnings report and earnings surprise history for Netflix, Inc. (NFLX) at NASDAQ.com. ... After Hours Activity; Stocks; Most Active ...
Read more

Netflix Collapses: Time To Buy? - Netflix, Inc. (NASDAQ ...

Netflix Collapses: Time To Buy? ... and an opportunity to start buying. The Fall: ... are an immediate buying opportunity. This suggests that after the ...
Read more

Netflix beats on earnings, but plunges after weak guidance

Netflix reported earnings that ... many more international opportunities will arise as the company ... CNBC after the earnings ...
Read more