Expectations were high going into Netflix's (NASDAQ: NFLX) second quarter 2018 financial report. The company was coming off a first-quarter record of 7.41 million total subscriber additions. Anticipation about the company's ongoing growth prospects had sent the stock into the stratosphere, gaining over 100% year-to-date.
In a recent article, I pointed out, "Its price-to-earnings ratio now clocks in at a whopping 265 times trailing earnings, while its forward multiple is 137 times. ... In light of its recent run up, Netflix may have to put up truly stunning numbers to keep its stock price growing."
In a rare move for the streaming giant, Netflix missed its own forecast and the stock is down 10% since the release.
Netflix original The Crown. Image source: Netflix.
A rare subscriber miss
Netflix reported total net subscribers that increased by 5.15 million, with 4.35 million international and 670,000 domestic additions. The company had guided for 6.2 million additions, expecting 5 million from international markets and 1.2 million domestically. This brings Netflix's total streaming customers to 130.14 million.
The company was quick to point out that estimates are just that, and the process is fraught with the potential for error. "The quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy, meaning in some quarters we will be high and other quarters low relative to our guidance," CEO Reed Hastings said in a letter to shareholders.
Diluted earnings per diluted share
Data source: Netflix Second-Quarter 2018 Financial release. Chart by author.
Netflix's revenue for the second quarter topped $3.907 billion, up 40.3% year over year. This missed Netflix's forecast of $3.934 billion. However, earnings per share of $0.85 outperformed.
Streaming revenue for the quarter grew 43% year over year, and the average selling price (ASP) per subscriber grew 14% compared to the prior year quarter, as recently enacted price hikes drove ASPs higher.
Netflix also said that its original content strategy was succeeding not only commercially but artistically, noting that the company took home more Emmy nominations than any other network. This feat broke a streak that HBO had going for 17 years. Netflix took home 112 nods this year to HBO's 108, with an impressive 40 different Netflix titles being recognized.
For the upcoming third quarter, Netflix is expecting to add a total of 5 million net new subscribers, with 4.35 million in international markets and 650,000 domestic additions. This would result in a total of 135.14 million subscribers, an increase of 24% compared to the prior-year quarter.
The company is guiding for revenue of $3.988 billion, which would represent an increase of 33.6% year over year. Netflix is also forecasting net income of $307 million, which would generate earnings per share of $0.68, more than double the $0.29 from the prior-year quarter. The company is shooting for operating margins of 10.5%, significantly higher than the 7% it produced this time last year.
As I pointed out earlier, this quarter's miss was a rare one for the streaming giant and occurred during what is historically a seasonally slow quarter. I don't believe this was any reflection on the massive and ongoing opportunity Netflix has or its prospects for long-term growth. The company was merely due for a breather.
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