Am I taking crazy pills? Netflix (Nasdaq: NFLX ) just did exactly what management said it would do, only faster and better than originally planned, yet investors still took the stock out for a public flogging.
According to Wall Street analysts, Netflix was supposed to post a $0.27 loss per share on revenue of about $869 million. The real numbers were slightly better than that with a $0.08 GAAP net loss on sales of $870 million. The company added 1.7 million domestic and 1.2 million international streaming customers this quarter, both at the upper end of management guidance.
All things considered, CEO Reed Hastings now expects a return to global profitability in the second quarter. That should release him early from a silly promise to stay out of international expansion until the bottom line turns black again. Indeed, Hastings seems to feel the same way: "Our rapid return to profitability," he said, "enabling further international expansion, is very gratifying."
Netflix by the numbers
Streaming video is a numbers game where more subscribers always means more profit, as the overhead cost for each new subscriber is close to zero. The foreign markets might add more new blood next quarter than the American home base does. These are positive trends, because the rest of the world is so much larger than America alone.
Going forward, Netflix expects domestic subscriber growth to continue along typical seasonality patterns while operating margin expands by about a percentage point per quarter. Maybe the seasonality explains why Mr. Market is running for the hills; the outlook for the second quarter looks timid thanks to the seasonal swings. The back half of the year should more than make up for it, so long-term investors will be fine.
Some observers say the company is about to drown in content costs, but I don't see it. Not only are the margins slated to grow, but management plans to spend money on more content deals -- not just servicing the license agreements already in place.
The most troubling tidbit I found in this release came from the Latin American market. As it turns out, credit cards are not very common south of the Rio Grande, and the local banks are nervous about online transactions in general. The shareholder letter published by Netflix yesterday reads: "Many banks turn down all ecommerce debit card transactions due to fraud risk, making it a more challenging environment than our other markets."
Problems of that nature could haunt Netflix again in other markets, such as the notorious piracy hotbed of Spain and -- way down the line -- the less robust banking environments in Africa or Eastern Europe. On the other hand, Netflix's integration with the Apple (Nasdaq: AAPL ) TV set-top box lets users sign up for Netflix service and then make their monthly payments through the solid iTunes commerce systems. Expand that relationship to iPhones and iPads, too, and Netflix could have a partial solution to the e-payment problem. The iEcosystem can be a powerful ally.
The long and short of it
These are the facts: Netflix met or exceeded analyst targets, will return to rapid international expansion ahead of schedule, and generally fires on every cylinder these days. And it's not as if investors roared into this week on a full tank of momentum and nitrous oxide: Share prices have been falling ever since the January report.
So it beats me why shares plunged about 16% in after-hours trading and are down sharply in the pre-market this morning. That makes no sense. Zero. None. The only reason to panic here would be if you had a big Vegas bet riding on millions of domestic subscriber additions in the second quarter.
The rest of us will see a return to form in the back half of 2012. Is that too long of a wait?
I already have a thumbs-up CAPScall on the stock, but I'm tempted to add it to my real-money portfolio at these prices. Get back to me in a few days, once our disclosure policy allows me to touch the stock again, and we'll see if the discount didn't expire already.
I believe that patient investors can buy Netflix here and sleep easy until the payoff starts in six months. Likewise, you could buy these four stocks now and cash in after the presidential election in November. Patience truly is a virtue.