Netflix (Nasdaq: NFLX) declined 9% following its Q1 earnings in which the company missed on estimates for subscriber growth. However, the company did top earnings expectations and was in line with revenue expectations.
The subscriber miss wasn't entirely a surprise given that it had warned in previous quarters that it was likely "pulling forward" future subscriber growth due to the pandemic.
Inside the Numbers
In Q1, Netflix reported EPS of $3.75 which was significantly higher than analysts' expectations of $2.97. Revenue slightly beat at $7.16 billion vs $7.13 billion. However, shares declined as global paid net subscriber additions came in at 3.98 million which fell short of expectations of 6.2 million.
The company attributed the miss to the coronavirus which has resulted in a delay in the release of its most popular titles. However, many investors are concerned that Netflix's growth story may be coming to an end which would likely result in multiple contraction and force the company to increase its focus on earnings. Of course, the streaming landscape has gotten more competitive which could result in price cuts and increased costs to secure content.
However, in its conference call, management said it doesn't see much of an impact in terms of subs leaving for competing platforms. It expects growth to resume once its content schedule returns to normal. It added that production is back to normal in most markets and expects to spend $17 billion on content this year.
It's also looking to crack down on password sharing as many accounts have multiple logins. So far, they are trying subtle approaches such as limiting the number of logins from one account to one or two locations at a time.
Stock Price Outlook
Overall, the market reaction to Netflix's earnings is puzzling. The company had been warning that its subscriber growth during the pandemic would mean-revert when the economy would start reopening at the same time its content releases would start slowing. And, this is indeed what is happening.
Like a lot of tech stocks, it's going to face high comps due to the pandemic resulting in a massive spike in demand. Given these headwinds, the report doesn't look as bad with 24% year over year revenue growth, and the company making a sharp turn into profitability.
EPS is expected to be $13 per share in 2021 vs $6 per share in 2020. The company also initiated a $5 billion buyback which will retire just over 2% of its float. If these trends can continue and sub growth resumes when its newest shows come out, then this dip could be an interesting, entry point.