It's safe to say that the market didn't take kindly to Netflix's (NFLX 4.17%) latest quarterly results, sending the stock crashing by 8% on Thursday. Revenue and earnings fell just short of expectations. Subscriber growth was in line with Netflix's initial forecast, but closing out the period with just 880,000 more domestic streaming subscribers than it had when the quarter began -- the dot-com darling's worst showing in more than a year -- isn't going to impress.
However, there was also plenty to appreciate in the stock that remains the S&P 500's best performer in 2015 despite the post-earnings sell-off. Let's go over a few of the reasons why you'll ultimately accept the report, and once again embrace Netflix.
1. We are knee-deep in what should be a record quarter
As bad as it was to see Netflix close out the third quarter with weak subscriber growth -- something that burned a lot of investors -- including me -- who interpreted its recent rate hike as a show of healthy account growth, things should get better in a hurry.
Netflix is forecasting 5.15 million net additions during the fourth quarter, a move that would push its global base of Internet-tethered video buffs north of 74 million. That would be a record period for Netflix, topping its previous high-water mark of 4.88 million during this year's freshman quarter.
Bears may point out that Netflix fell short of analyst forecasts for subscriber growth during the third quarter, but the 69.17 million global streaming accounts on its rolls as of the end of September is actually just ahead of its own public forecast of 69.1 million. Wall Street got a bit ahead of itself this time, but Netflix's forecasts have been reasonably solid.
2. International House of Bandwidth is artificially suppressing profits
Netflix has become an international entertainment play. International net additions have outpaced stateside ones for six consecutive quarters, and that's not going to change anytime soon. The problem for results-oriented investors who don't have time to see the big picture develop is that Netflix is paying dearly today for expanding into new markets that will pay off tomorrow.
Netflix's year-over-year profitability took a hit in its latest quarter, but that was almost entirely the handiwork of the high costs of launching in new territories. The contribution profit for its stateside streaming business soared 37% during the past year, outpacing the 21% uptick in domestic streaming revenue. Yes, contribution margin dipped sequentially, but that, once again, brings us to Netflix's forecast for the new quarter, where it sees record contribution margin for its stateside operations. Get over the near-term losses being incurred internationally, and Netflix has never been better.
3. Wait until 2017, and this will be a beautiful thing to watch
Netflix expects to materially finish its overseas push by the end of next year. China seems to be the only real question mark. Netflix is reminding everyone that the push into Asia and beyond will eat into next year's potential earnings, but it sees "material profits" after that.
Anyone who values Netflix based on a trailing, or even forward, earnings multiple is missing the real story. Netflix has more than 69 million streaming accounts, closing in on 75 million by early January. It's not cheap to get that big so quickly. It has now pushed through a pair of annual price hikes with little resistance. Between having a profitable international arm, and the fat margins that will get only juicier based on what Netflix is charging come 2017, there's a reason why Netflix remains this year's biggest gainer on the S&P 500.
Netflix may have burned brand new investors on Thursday, but the future remains bright for one of the market's best growth stocks during the past three years.
