History is on the side of Netflix (NFLX) bulls who are licking their wounds on Wednesday after the streaming giant whiffed on its first quarter subscriber growth goals.
Bank of America analyst Nat Schindler showed in a new research report Wednesday that Netflix shares often rally in the months after the company falls short on subscriber targets (chart below). Some of the largest gains have been seen 12 months after a miss, led by a 134% surge after Netflix missed subscriber estimates in the first quarter of 2017.
Unsurprisingly, Netflix shares are more volatile in the month following a subscriber shortfall, likely as investors determine if the company is experiencing a fundamental shift in its business for whatever reason.
"Price action following the past quarters when Netflix missed its net subscriber estimates show these infrequent misses usually create particularly attractive opportunities as investors read too much into the quarter-to-quarter fluctuations of the business. While historical stock prices are not an indication of future stock performance, we view this quarter’s subscriber miss as a potentially attractive opportunity as we believe the long term growth story for Netflix is still intact and nothing has fundamentally changed," Schindler said.
Schindler reiterated his Buy rating on Netflix and $680 price target.
Even with history favoring the bulls, Netflix's first quarter had several red flags for investors to digest.
First quarter paid subscriber additions came in at 3.98 million, missing analyst estimates for 6.29 million. The company pinned the blame on the lack of compelling new content, but it's likely the reopening of economies and COVID-19 vaccination rates that played a role in the subscriber miss. Netflix stayed hopeful it will return to form later this year as it releases new content.
But the uncertainty on that happening amidst the great reopening of the world from the pandemic was expressed in Netflix's guidance.
The company forecast second quarter sales growth of 18.8%, sharply lower than the 24.2% seen in the first quarter. Operating margins are pegged at 25.5%, down from a record 27.4% in the first quarter. And, annual paid membership are expected to grow 8.1% in the second quarter compared to 13.6% growth in the first quarter.
Shares plunged nearly 10% in pre-market trading Wednesday.
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