Netflix Shares Plummet After Lower than Expected Earnings

Cornelia Mascio
Luglio 19, 2020

Netflix stock tumbled as much as 8.5% in premarket trading on Friday as investors shrugged off the video-streaming platform's robust growth in the second quarter and focused on its disappointing third-quarter forecast. Since going public, the streaming giant has split its share twice. Sarandos added that he was at first "skeptical" about the business plan because "the internet was still so new and Netflix's main competitor, Blockbuster, was huge and had completely disrupted the business model of my previous company". That hasn't materialized. Netflix is still adding subscribers more than eight months after Disney+ launched.

Part of the reason is that some subscribers are paying for more than one streaming service.

The biggest concern for Q2 as lockdown measures were eased is whether Netflix would be able to add to these numbers, or whether we would see a Q2 drop off, on account of a pull forward effect.

Netflix on Thursday announced it had added 10.09 million more paid subscribers than expected, as audiences bound to their homes because of Covid-19 restrictions binge-watched its shows in the absence of live events and movie theaters. Net earnings, meanwhile, were at US$720mln, up from net income of US$270.7mln a year ago. Shares of Netflix have soared almost 49% year-to-date.

Netflix has also faced the prospect of a shortage of new titles as the ongoing crisis shuts down production. Now those fears seem unlikely to materialize.

Sarandos has been essential in building Netflix's original content.

Despite the pandemic, Netflix has an extensive library of new shows planned for this year. Netflix said Thursday that it's slowly restarting production, largely from Asia and Europe, and also its own 2020 line-up remains undamaged. There are also places such as South Korea, where production was never really halted. In Europe and the US, production has resumed in some parts on a limited scale.

"While a high level of consumption is desirable, it drives a need to constantly replenish the content consumed, and Netflix's extraordinary level of consumption multiplied by its large subscriber base suggests to us that some meaningful percentage of subscribers will "finish" Netflix before a large quantity of new content can be produced".

Netflix's operating margins are on an upward trend.

The COVID-19 pause in manufacturing "pushed out money spending on content material into the second half of 2020 and into 2021", Netflix mentioned in the shareholder letter.

Nearly 26 million of these subscribers have combined Netflix throughout the initial six months of the season - more than twice the amount in comparison with last season - since the pandemic curtailed traveling and nights out to the town. Compared to rivals such as Amazon Prime and Hulu, Netflix is vastly outspending them. Netflix's Q2 earnings included two non-cash costs: a $119 million unrealized loss from foreign-exchange remeasurement on its Euro-denominated debt and a $220 million "valuation allowance" for deferred tax property (as a outcome of current laws limiting using California R&D credit). Our research found that one in three United Kingdom consumers plans to cancel their streaming subscription once lockdown lifts - a trend that will likely be reflected in next quarter's earnings. Last year's free cash flow in the second quarter was -$544 million.

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