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Netflix (NFLX) Stock Surged Monday: Time to Buy Again?

Benjamin Rains
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Netflix (NFLX) Stock Surged Monday: Time to Buy Again?

Netflix (NFLX) saw its stock price climb over 4% Monday, which helped stop some of NFLX's post-Q2 earnings decline. So let's see what had investors so excited. Plus, is it time for you to jump back into Netflix stock now?

Netflix NFLX saw its stock price climb over 4% Monday, which helped stop some of NFLX’s post-Q2 earnings decline. So let’s see what had investors so excited. Plus, is it time for you to jump back into Netflix stock now?

Recent News

Some Netflix users were outraged to see that the streaming giant began to test advertisements in between episodes recently. Netflix started to run short ads for other NFLX content based on its recommendation algorithms during the countdown period before the next episode of a show automatically starts to play.

The company seems poised to do all it can to keep users engaged, and promoting new content seems like an extremely logical step. But, Netflix was quick to point out that its user experience won’t change after backlash quickly spread around the internet, driven by Reddit angst. “We are testing whether surfacing recommendations between episodes helps members discover stories they will enjoy faster,” Netflix wrote in a statement. “It is important to note that a member is able to skip a video preview at any time if they are not interested.”

Clearly, there is worry from users that Netflix’s experiment could lead to the dreaded pre-roll ads before shows. Investors should remember that many Netflix subscribers pay for the premium streaming service to avoid ads. Yet, the potential revenue stream could be too appealing to pass up altogether. 

Netflix’s advertising updates come roughly a week after the company said that long-time CFO David Wells will step down from his role to follow charitable pursuits once he helps find his replacement. Investors didn’t love this announcement, but the company has some other far more important issues to work out.

Company Overview

Netflix saw its revenues soar roughly 43% to hit $3.91 billion last quarter, which should have helped the firm’s stock price climb even more. Instead, shares of NFLX had sunk nearly 18% since the company reported its Q2 financial result on July 16, prior to Monday's climb. Shares of Netflix are still up nearly 100% during the 12 months and look great over a two-year stretch.

 

 

Netflix added 5.2 million new subscribers last quarter, which came in 1 million below its 6.2 million forecast. The company also missed its U.S. growth projection and only added 4.5 million international subscribers, when it called for 5 million.

The firm’s poor performance looked much worse compared to its recent impressive run of outsized subscriber growth. NFLX had topped its own subscriber forecasts in seven out of the previous nine periods, including beats in the trailing four quarters—NFLX surpassed its estimates by 1 million in Q1 and topped its Q4 forecast by 2 million.

Outlook

Netflix did close the quarter with over 130 million subscribers worldwide, which marked roughly 25% growth from the year-ago period’s 104 million. Plus, the company has committed to spend billions on content to attract new users. But, NFLX’s U.S. subscriber growth outlook highlights a somewhat uncertain future amid increased competition.

Netflix thinks its U.S. subscriber base can grow to between 60 to 90 million—NFLX ended Q2 with roughly 57.4 million U.S. subscribers. Therefore, the firm could add over 30 million more users in the U.S. alone, or see very little growth at all. Reed Hastings’ company does expect to add 5 million new subscribers during the third quarter, with 650,000 projected in the U.S. and 4.35 million internationally.

Netflix is projected to see its Q3 revenues surge by nearly 34% to reach $3.99 billion, based on our current Zacks Consensus Estimate. Meanwhile, NFLX’s adjusted quarterly earnings are projected to skyrocket over 134% to $0.68 per share. However, Netflix has received nine downward earnings estimate revisions for Q3 over the last 60 days, against just four upward changes. Worse still, NFLX has earned 15 negative revisions during this same time period for its current fiscal year, against only two positive changes.

Netflix is also trading at an extremely high earnings multiple. Plus, the company not only faces competition from Hulu, Amazon AMZN, and YouTube GOOGL, but also from the likes of Disney DIS and Apple AAPL, which are set to enter the streaming TV market next year. Therefore, investors might still want to be cautious about Netflix stock at the moment.

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