Netflix stock fell to within a whisker of its 52-week low, as investor confidence evaporated from the stock in retaliation to a conservative forecast guidance from Netflix, but not so much any weakness in performance.
Netflix smashed its numbers, but was crucified with a 15.4% stock price fall simply because it released its internal forecast to investors who expected more. The Netflix team has never been understood by stock investors who like an easy ride, but we can see no underlying change to its success rate, except to say that it is perhaps even stronger than its position a year ago.
One of the factors that Netflix has to guide on is future take up of its service, but when it enters territories such as Australia, where it was well known and widely viewed already through VPN connections, it picked up far more customers than it did when it came to a market cold. As a result, it has tried to limit expectation for a repeat of an outstanding performance in Australia and New Zealand, which seems reasonable. The market, dumb and led by a herd mentality, took this to mean that its entire 130-country wide international business would stall, which it clearly won’t.
Net customer additions in Q1 were a record 6.74 million, because of this “anticipation” factor in Australia, when compared to 4.88 million a year earlier taking it up to 81.5 million members, far more than anyone had predicted.
The company said that 42% of its customers are now outside of the US. Some investor journals suggested that this meant it was ignoring the US. Funny no-one ever says that about Apple when it has a record quarter – and is stronger outside the US than in.
Netflix showed strains of investing in some much needed local content with operating income down at $49 million against $97 million a year ago, but that bodes well for a future when Netflix hopes to yield higher margins.
In the US, Netflix added 2.23 million customers in the quarter compared to 2.28 million a year ago, and 2.25 two years ago. It had forecast just 1.75 million and in the coming, traditionally weaker quarter, it has forecast just 500,000 new customers from the US. Clearly Netflix is going to kill that number, but what it doesn’t want to have is that critical quarter when customer and/or revenue falls in the US, and it is directing expectations lower all the time, instead focusing on its margin for the US which it says will reach 40% by 2020. The company forecast a flat year on year margin, but only for Q2 whereupon it says its margin growth will continue in the US.
US revenue was up 18% year on year to over $1.3 billion, with 14% more members, and a rise in ARPU of 3%. There are more margin gains built in, as the effect of “grandfathering” prices against price increases, wears off in the coming 12 months.
But the big news was that Netflix only forecast a gain of 2 million customers in Q2 internationally, not much more than a year ago. While Q2 is its weakest period, it has virtually no data on how its launch into 130 countries might go in a weak quarter, so it is simply guessing as low as it can. It was a move that undermined confidence and its market cap fell $7 billion, to $40.3 billion.
Our take is that Netflix will not recover substantially as a stock, until Q2 is played out, whereupon it will go even higher, but what do we know – we’re tech analysts not stock analysts. All we can say is there is no indication in the Netflix shareholder letter that anything in the Netflix camp is any weaker than it was a week ago.