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Should Investors Stay Away From Netflix (NFLX) Stock?

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Netflix (NFLX - Free Report) has seen its stock price plummet over 12% since the streaming TV firm reported quarterly financial results that scared investors, with much of the concern directed at lower-than-expected subscriber growth. But while some might want to buy NFLX stock on the dip, now might be time for continued Netflix caution.

Q2 Overview

Netflix posted adjusted earnings of $0.85 per share, which topped our Zacks Consensus Estimate. The firm saw its Q2 revenues soar roughly 43% to hit $3.91 billion. However, the company fell short of revenue projections because it came in well below its own subscriber estimates.

Netflix added 5.2 million new subscribers last quarter, which came in 1 million below its 6.2 million forecast. At 700,000, the company missed its 1.2 million U.S. user growth projection. Meanwhile, Netflix added 4.5 million international subscribers, when it called for 5 million new subscribers outside of the U.S.—where the company is supposed to have more room to grow.

User Growth Worries?

Netflix closed the quarter with just over 130 million subscribers worldwide. This marked a roughly 25% surge from the year-ago period when the company closed the second quarter with 104 million total subscribers. The worry here is two-fold. It is hardly a great sign that management was so far off on its own vital growth estimates. The other much larger concern is did the second quarter spell the start of plateauing subscriber growth?

 

 

The company had topped its own subscriber forecasts in seven out of the previous nine periods, including beats in the trailing four quarters. More worrisome still is that Netflix had crushed its forecasts recently.

Netflix added 7.4 million new users in Q1, beating its estimate by 1 million. The company topped its Q4 2017 forecast by 2 million, its Q3 projections by 900,000, and its Q2 estimates by 2 million.

The last time Netflix fell short of its subscriber forecast was in the first quarter of last year when it added 5 million new users when it called for 5.2 million. “We've seen this movie of Q2 shortfall before about two years ago in 2016,” Hastings said on NFLX’s Q2 conference call.

“We never did find the explanation to that, other than there's some lumpiness in the business and continue to perform after that.”

Looking Ahead

Netflix expects to add 5 million new subscribers during the third quarter, with 650,000 expected in the U.S. and 4.35 million internationally. The U.S. subscriber figures will become increasingly important since there are already signs that the company’s days of large domestic growth are over. NFLX ended the quarter with roughly 57.4 million total U.S. subscribers up around 10% from the prior-year period’s 51.9 million.

However, the firm’s long-term view is that its U.S. subscriber base can grow to between 60 to 90 million. Therefore, on the low-end, Netflix has practically no room to grow at home, while it could add more than 30 million users on the high end. Netflix’s extremely broad domestic growth forecast demonstrates how saturated the streaming market is, but also how uncertain the company’s future is.

Amazon’s (AMZN - Free Report) Prime Video and Amazon Studios offer an array of movies and TV shows, from big-budget action series to indie-style dramas featuring A-list Hollywood stars that help it compete against Netflix. Plus, Jeff Bezos’ company has no plans to stop its entrainment push. Meanwhile, Disney (DIS - Free Report) and its array of box office hits and historic movie franchises, is set to launch its own streaming TV platform in late 2019. Apple (AAPL - Free Report) has also amassed stars both in front of and behind the camera for its own streaming debut—which is still up in the air though reports suggest it will come out at some point next year.

The problem for Netflix is that Amazon and Apple are two of the richest companies in history, with billions to spend on side projects without breaking a sweat. Disney is a historic entertainment power that is ready to spend over $70 billion on key Twenty-First Century Fox (FOXA - Free Report) assets to better compete in the new age of entrainment Netflix helped spark.

Bottom Line

Netflix is projected to see its full-year revenues surge by nearly 36% to $15.89 billion, based on our current estimates. The company is expected to see its adjusted earnings skyrocket 115% to $2.69 per share.

It is a good sign that Netflix looks poised to grow its top line by an impressive amount, while also becoming much more profitable. But the company has seen a ton of downward earnings estimate revisions over the last 30 days for Q3, the full year, and fiscal 2019. NFLX is also trading at over 95X forward 12-month Zacks Consensus EPS estimates. Therefore, investors might want to remain cautious about Netflix for the time being.

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