Netflix (Nasdaq: NFLX) shares were down a little over 3% following the company's mixed Q2 results. The company missed on earnings but beat expectations in terms of revenue and new subscribers. It also confirmed reports that it plans to move into gaming.
Inside the Numbers
In Q2, Netflix generated $2.97 in earnings per share which was lower than consensus expectations of $3.16 per share. Despite the miss, it was an 87% increase in EPS. Revenue slightly beat expectations at $7.34 billion vs $7.32 billion which was a 19% increase from last year. Global paid net subscriber additions came in 1.54 million, higher than expectations of 1.19 million expected. In total, the company had an 11% increase in streaming memberships and an 8% increase in average revenue per user.
The company's user growth has been slowing which has been expected by the company due to the pandemic "pulling forward" demand. Currently, the company has 209 million paid members. In its earnings release, the company said: "COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through. We continue to focus on improving our service for our members and bringing them the best stories from around the world."
In terms of its Q3 forecast, Netflix expects 3.5 million new subscribers which fell short of expectations of 5.4 million new subscribers. This expectation in user growth is expected as the company is expected to release many new shows in the second half of the year as these releases were delayed due to the pandemic.
The company noted in its conference call that its user growth was on track but "lumpy" due to the pandemic. Over the past 2 years, the company added 54 million new users which are consistent with its pre-coronavirus growth trend.
The company also confirmed rumors that it was entering gaming and sees it as a new category. Getting into gaming is no simple task even with deep pockets as Amazon's high-profile failure made clear. However, Netflix has defied convention before by successfully entering original films, animation, and unscripted TV.
In anticipation, Netflix has been hiring well-known executives from the industry and is initially planning on launching mobile games. Given the large amounts of time people spend on Netflix and its massive user base, the company will certainly get a chance to put its product in front of consumers although success is far from certain.
Stock Price Outlook
Although the market seems disappointed by Netflix's earnings miss, deceleration in user growth, and underwhelming outlook, the numbers are actually not bad given the tough comps and unique nature of the pandemic. In fact, many expected an increase in cancellations as people would be eager for new activities and also due to the proliferation of new streaming services.
Therefore, the fact that Netflix was able to continue growing is a positive sign. Additionally, the company is becoming increasingly attractive in terms of valuation based on its forward P/E and juicy margins. Additionally, the recent decline in rates likely means that the environment for growth stocks will continue improving.