The headline numbers could have been problematic for Netflix (NASDAQ: NFLX) bulls. The world's leading premium video service came through with blowout first-quarter results, but the initial enthusiasm cooled after the market sized up the streaming darling's early read on the current quarter.
Netflix forecast a profit of $0.55 a share for the second quarter -- well below the prior year's net income of $0.85 a share and the $0.99 a share that Wall Street pros were targeting. Netflix expecting to close out the new quarter with 5 million global streaming net additions was also short of analyst targets and its prior-year haul. Despite the grim hiccups in its near-term outlook, Netflix stock opened slightly higher on Wednesday, and while it would spend the first couple of hours bobbing up and down, it certainly didn't crater like bears figured would be the case. Let's go over the reasons why Netflix held up well despite its mixed showing.
Image source: Netflix.
1. Taxes matter
Net income is expected to fall sharply in the second quarter, but it's not a problem that will linger. Accounting items based on one-time discrete events are pushing the expected effective tax rate up to 48% in the second quarter.
Ignore the inflated taxes for the current quarter, and Netflix hasn't been better on other fronts higher up on the income statement. It's eyeing a record operating profit of $616 million on its highest operating margin in years. In short, there's a big fat asterisk next to the $0.55 a share that Netflix is forecasting for the second quarter.
2. You can make more out of less
Netflix eyeing net additions of 5 million streaming subscribers worldwide would be its weakest increase since the first quarter of 2017, but there's more to unpack here. This may be its lowest user gain in two years, but Netflix is in the process of pushing its rates higher in the U.S. and several other key markets.
We're not talking about an insignificant inflation-adjusted bump here. Stateside prices are going up between 13% and 18% this month for existing subscribers, and it's going to juice up average revenue per user -- a metric that has meandered as Netflix pushes into smaller global markets. Unlike the first quarter -- in which subscriber gains over the past year topped top-line growth -- it will be the other way around in the second quarter.
It also bears stressing that the second quarter is a seasonally sleepy period for Netflix. If we squeeze the first two quarters together to smoothen out the numbers with a wider net of data, we have Netflix targeting 14.6 million net streaming additions through the first half of 2019, up from the 13.7 million it tacked on during the first six months of last year.
3. Netflix has been stagnant since its last quarterly report
Sometimes you'll see a stock sell off after a mixed quarter following a monster rally, but that's not where Netflix is at these days. Netflix has been one of the S&P 500's top performers over the past few years, but it's been a laggard over the past three months. Shares are roughly where they were when Netflix announced its first-quarter financials three months ago.
Momentum investors may not like the calm before an earnings storm, but it does make it easier for investors to appreciate the nuances of a solid quarterly outing. Netflix continues to be the dominant player in a booming niche, and the market doesn't ignore that kind of pole position placement for long. Netflix stock isn't cheap, but by most accounts, it's worth it.
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