What’s happening: Netflix reported the strongest financial results in its history, after adding a record number of paid subscribers during the first quarter.
What happened: The world's largest streaming service added 15.8 million customers from January through March, surpassing its own prediction of 7 million subscriber additions. The company also issued a healthy earnings guidance for the second quarter.
Despite the robust growth, there are some investor concerns around Netflix. Although the company’s stock spiked 10% shortly after the quarterly release, it fluctuated wildly and even fell to negative territory as investors digested the complete details provided by the company. Shares of Netflix closed the trading session yesterday down 0.84% at $433.83.
What were the results: The company reported sales and earnings growth for the first quarter. Despite adding a record number of paid subscribers, Netflix missed earnings expectations
- The company’s sales climbed 28% to $5.770 billion, beating the consensus estimate of $5.760 billion.
- Earnings grew a whopping 107% to $1.57 per share but came in meaningfully below expectations of $1.65 per share.
- The company’s first-quarter global streaming subs jumped 23% to 182.86 million
Why it matters: Netflix is among the handful of companies to benefit so much from the coronavirus pandemic and consequent stay-at-home orders. With an explosive growth in paid subscribers, Netflix highlighted the popularity of its latest “originals,” which included Tiger King, with a viewership of 64 million households since its debut in late March, and dating reality show Love is Blind, with around 30 million households. Among movies, Spenser Confidential recorded the highest views, at 85 million.
Netflix experienced strong subscriber growth globally and achieved positive free cash flows for the first quarter since 2014. The company guided to earnings of $1.81 per share for the second quarter, well ahead of the consensus estimate of $1.54 per share.
Although everything seems great at Netflix, there are some concerns. To begin with, the surge in paid members could be temporary. The company may witness a loss of subs as economies begin to reopen. The duration of the boom is also uncertain. While projecting 7.5 million subscriber additions in the second quarter, management warned of decline in viewing and membership growth as home confinements end.
The company’s sales and profits are impacted by strength in the US dollar, as this lowers its international revenue. The greenback is expected to remain at elevated levels in the near term.
On the other hand, the coronavirus lockdowns have impacted new content creation. The delays in adding new movies and releasing new titles could affect viewership in the months ahead.
How the shares responded: Shares of Netflix have been moving higher, despite the broader market downturn. The stock has gained 30% in a month and more than 34% year-to-date.
What to watch: Shutdowns in new content production could be a concern. Even after the economies gradually open, it will take time to produce and release new content. Moreover, Netflix faces stiff competition from Disney+ and WarnerMedia, which have massive libraries of videos.