Netflix Plummets on Weak Guidance

04/19/2016 9:55 am EST

Focus: TECHNOLOGY

Michael Berger

President & Founder, Technical420.com

Although Netflix reported better than expected earnings, the stock is down more than 8% after the company issued weak guidance; Michael Berger, Associate Editor of MoneyShow.com, highlights this technology stock and is cautious with shares at current levels.

For some companies, beating earnings is just not enough.

Netflix Inc. (NFLX) happens to be one such company.

After the market closed yesterday, NFLX fell more than 9% after the company beat expectations for earnings per share and new subscriber additions in the US and internationally.

Although NFLX beat expectations, the company reported revenue that came in below estimates. During the quarter, Netflix recorded $0.06 in earnings per share on $1.96 billion in revenue.

Poor Guidance Drives Sell-Off

During the first quarter, Netflix added 2.23 million subscribers in the United States and 4.51 million subscribers internationally. Analysts expected the company to add 1.82 million and 4.49 million subscribers, respectively.

Net subscriber additions is by far one of the most important metrics for Netflix. Although net subscriber growth was better than expected during the first quarter, Netflix issued second quarter guidance for new international subscribers that came in well below expectations.

Netflix said it expects to add just 500,000 US subscribers and 2 million international subscribers, the slowest customer growth in two years.

The company’s expectations for net international subscriber additions during the second quarter fell short of the 3.45 million estimate.

Subscriber Churn in United States

Netflix has started the process of un-grandfathering its United States subscribers base and many analysts expect this to cause the company to face a subscriber churn.

This means that long-term customers who are used to paying $7.99 per month, will now be required to pay $9.99 per month. Although the increase seems small, it is significant for customers who are trying save money.

In the current quarter, Netflix plans to roll out price increases to its customer base slowly over the rest of the year. Starting next month, longtime customers will see a $2 increase to their monthly fee to $9.99 a month.

International Subscriber Number Faces Tough Comparison

In the first quarter, Netflix expanded into 130 more countries but the company still faces a tough year-over-year comparison.

During the same period last year, Netflix launched its service in New Zealand and Australia, which resulted in significant subscriber growth. Netflix is offered only in English. For this reason, it was easy to attract new subscribers from New Zealand and Australia. 

In the coming quarters, Netflix plans to add more local languages, content, payment options, and customer support. It will take time for subscriber growth to ramp up to the levels seen last year and we believe this could put more pressure on the stock.

Shares Rally Off of Lows

Netflix was down more than 9% after the market closed yesterday and shares have rallied off of its lows. NFLX is down almost 9% and shares are trading below $100.
We are on the sidelines with NFLX at current levels would see value in shares on continued weakness.

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