Please ensure Javascript is enabled for purposes of website accessibility

3 Things Tripping Up Netflix Stock After a Blowout Quarter

By Rick Munarriz – Jul 17, 2020 at 9:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The leading premium streaming video platform had a strong -- but ultimately imperfect -- quarter.

Shares of Netflix (NFLX 9.20%) moved sharply lower after the company posted its second-quarter results shortly after Thursday's close. Yet the quarter itself was impressive. The planet's leading premium video service grew its subscriber base by 10.1 million paid members between the end of March and the end of June. It was forecasting a still healthy 7.5 million in net adds back in mid-April. Revenue and earnings -- after adjusting for one-time charges -- also exceeded earlier guidance.

There was a lot to like in Thursday afternoon's report, but the stock tumbled anyway. Let's go over three reasons why a blowout second quarter wasn't enough.

Netflix app running on a smartphone.

Image source: Netflix.

1. Guidance was weak

Looking back is a big part of every financial update, but it often plays second fiddle to the look ahead. The third quarter is going to be challenging for Netflix. It tacked on a record 25.9 million more members than it lost through the first half of 2020, but it's modeling just 2.5 million net additions for the current quarter. 

The pandemic sped up signups at Netflix, pulling new registrations into the first half of the year that otherwise would've likely taken place later in the year. We saw the opposite scenario play out last year, as a large increase in monthly rates early in the year delayed new registrations into the latter half of 2019. 

It's not just the pace of new viewers that will be decelerating. The 20.6% year-over-year revenue that Netflix is forecasting for the current quarter would be its weakest top-line gain since mid-2013. Even if Netflix is being conservative with its guidance, the forecast for its near-term performance is weak even by historical low-balling standards.

2. Two corner offices 

CEO Reed Hastings is ready to share the helm. One of the biggest headlines out of Netflix's second-quarter announcement is that Chief Creative Officer Ted Sarandos has been tapped as co-CEO. He was also added to the board of directors. 

This isn't a necessarily a bad thing. Sarandos is clearly the second-most prolific hire at Netflix, and he would be the odds-on favorite to be its new helmsman if Hastings should ever retire or enter the political arena. It's probably surprising that the guy responsible for so much of Netflix's success on the content front wasn't already a voice in the boardroom. However, the move to have Sarandos share the CEO office with Hastings does leave one wondering if Hastings is already thinking out a secession strategy -- even if he did mention that he has no plans to leave Netflix anytime soon.

3. Hot stocks heat up expectations 

Bullish momentum is a good thing for investors, but it also gives a company little margin for error when it steps up to the financial podium. Netflix stock -- up 62% year to date and up 21% since posting its first-quarter results -- had a lot of helium heading into this week's update.

This will still be a great year for Netflix. It should top 195 million global streaming paid memberships by September, and this will be a record year by most measuring sticks. History will likely view the Sarandos promotion as a very positive move. Thursday's report wasn't perfect, but Netflix continues to be one of the market's strongest growth stocks

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$245.00 (9.20%) $20.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.