What happened
Shares of Netflix (NFLX 0.50%) fell by as much as 4.8% on Wednesday morning following the media-streaming specialist's second-quarter earnings report. Netflix beat some financial targets while falling short on others, and the market focused on the unsatisfactory pieces of the puzzle. The stock was down by 4.1% as of 1:25 p.m. EDT.
So what
Second-quarter revenues rose 19% year over year to $7.34 billion, slightly above management's guidance of $7.30 billion and Wall Street's consensus estimate of $7.32 billion. Earnings jumped 90%, landing at $2.97 per diluted share. Here, the guidance target pointed to $3.16 per share and the average analyst wanted to see roughly $3.15 per share. Netflix's operating profits also came in just below management's official target, while its 1.54 million net new paying subscribers exceeded the official goal of 1 million.
Looking ahead to the third quarter, Netflix forecast that it would add 3.5 million net new subscribers, below the Street's consensus estimate of at least 5 million new accounts. Management also said that it will roll out a range of games as a free add-on to its video-streaming plans, turning every Netflix-capable device into a potential gaming platform.
Image source: Netflix.
Now what
It's no surprise to see the Netflix bears focusing on a soft bottom-line reading and a modest forecast for next quarter's subscriber growth. At the same time, the company's second-quarter profits were low for all the right reasons, reflecting a 10% increase in content costs and 39% higher marketing expenses. The company is putting its back into building and promoting a better video service. That's exactly what I was hoping to see in this report.
Wednesday's share price haircut makes sense from a certain point of view -- one in which solid short-term profits matter more than fantastic long-term returns. Netflix is doing everything right at the moment. Opportunistic investors should see this price drop as a wide-open buying window.
