U.S. Markets closed

Everyone loves Netflix, so why is the stock down?

Aaron Pressman
Everyone loves Netflix, so why is the stock down?

Netflix (NFLX), the world’s biggest Internet video service, on Monday posted better-than-expected second quarter results, as it passed 50 million subscribers. So why is the stock down almost 6% in Tuesday afternoon trading?

Amid all the hoopla and growth, Netflix CEO Reed Hastings slipped in a significant caveat. The company is expanding aggressively into France, Germany and a few smaller European countries starting in September, sooner than expected, and the move is going to cost big bucks, he warned.

Shares of Netflix were trading at $426.54 Tuesday; they've gained almost 16% so far this year.

“Our broad success from Argentina to Finland has convinced us to further invest aggressively in global expansion,” Hastings wrote in his quarterly shareholder letter. “Our European expansion this quarter will add new expenses to the segment, so we expect a consolidated contribution loss of ($42) million for the international segment in Q3.”

"The great unknown"

That prompted some analysts to increase their projected subscriber gains for Netflix internationally, while trimming profit estimates. Investors reacted more strongly to the short-term pain than the potential long-term gains.

That may be because the strategy also adds considerable uncertainty to analysts’ forecasts and models, Michael Nathanson, senior analyst at MoffettNathanson, says. “As Netflix plans to launch new services in six European markets this September, the juggling of core international margin improvement against new territory launch costs is anyone’s guess – welcome to the great unknown,” he wrote.

Nathanson reduced his estimate of Netflix 2014 total earnings per share to $3.45 from $4.15. But he also increased estimated 2015 profits to $5.50 a share from $5.35. The analyst expects Netflix will enter the Italian and Spanish markets next year, though the company has not said anything about such a move.

Sterne Agee analyst Arvind Bhatia increased his estimate of international subscribers to 16.16 million at the end of the third quarter, from 15.3 million previously. He also trimmed earnings per share for the third quarter by a penny to 94 cents and, much more significantly, to $6.40 per share from $7.37 for 2015.

And Credit Suisse's Stephen Ju dropped his 2014 estimate to $4.89 from $5.13, and next year's to $4.49 from $5.12.

None of the analysts were brave   or foolish   enough to rate Netflix shares as a buy at the current price, which translates to a P/E ratio of 162.

Overall, research tracker FactSet tallied 21 analysts on Tuesday cutting their short-term earnings forecasts, covering the rest of 2014, with just seven increasing their forecasts.

The company has successfully executed on its previous international country moves, spending big bucks up front to cover the rights to hot programming and slowly building up subscriber revenue to cover those costs. Netflix was just about to break even on its current international business when Hastings announced the losses expected for the new European expansion.

Netflix's recent $1/month price hike for new customers wasn’t to blame for Tuesday’s selloff. Hasting called it “background noise” and said it had “no noticeable effect in the business.”