Netflix Drops Big from Less Exciting Quarterly Report

Netflix

Netflix’s quarterly earnings report looked pretty decent all in all, with earnings beating expectations and the number of subscribers up, but they got severely punished anyway.

Netflix is a stock that can move a lot more than the market does, and between Christmas and last Wednesday, it was up a mouth-watering 66%. That didn’t just beat the averages, it clobbered them, and this sort of return in a little over 6 months is pretty heady indeed.

This huge move up just took it back to where it was last October though, when it fell by an equal amount during the last quarter of 2018, meaning a lot. It’s not hard to see why position traders love this stock, because a lot of money can be made on both sides by following big trends such as these, and Netflix does trend well indeed.

Position traders don’t really care what direction a stock moves in, provided that it moves a lot. It is not always so easy to trade these trends, as you do get a lot of noise within them, but if we can filter this out and stick with the overall trend such as the drop late last year and the move up since, trading this way can be pretty lucrative indeed.

Netflix has had a tougher time of it during the last 5 trading days, from the close of the Wednesday before to the close of this past Wednesday, but this really wasn’t a move that was all that unusual and not anywhere near as much as it dropped last May, only this time the drop was leading up to a quarterly earnings report.

When your stock loses 5% in the week leading up to an earnings call, especially when the overall market is moving in the other direction, this indicates some real nervousness. A disappointing earnings call with a stock this volatile can make 5% look like small potatoes as far as how much these things can drop it further.

Netflix has actually been trading in a range for almost all of 2019, in spite of being up so much. Most of these gains were put in during the last week of 2018 and the first 2 weeks of 2019, and while it has toyed with the levels of last October 2 at various times, including with the July move that recently died in this area as well, it hasn’t really been that bullish overall since mid-January.

This is a classic sideways move actually, in spite of the market continuing to move ahead. Since January 15, the Nasdaq is up 17% while Netflix has lost ground. This tells us that the market really doesn’t have much of an appetite to take this stock beyond this resistance, but they sure can move the other way if inspired enough to do so.

Many are expecting the earnings season to be a disappointing one overall due to the slowdown in the economy, and in a lot of cases, there will be real disappointment. It’s expected by many that this will limit further new highs in the indexes and we might even pull back a little, to the levels at the end of May, or perhaps by even more, before things settle in from this.

Netflix’s Earnings Were Actually Pleasantly Surprising

Netflix announced their earnings after the bell Wednesday, and in terms of their earnings at least, the news was better than the street expected, which is not necessarily a good thing in itself but when earnings disappoint, that’s clearly not what people long the stock want to see.

It’s hard to say exactly how far Netflix would have fallen overnight if the earnings did miss by a significant amount, but we would almost certainly have seen it give up 20% or more, which is an incredible amount for a stock this size to give up in a flash. Earnings reports hit like an incoming missile and the biggest part of the dirty work does occur literally in a flash, like an incoming missile that you don’t see or hear until it hits you.

The damage from this particular missile wasn’t quite that bad, and Netflix’s 60 cents per share beat the consensus estimate of 56 cents. Revenue came right in around what was predicted, so no real change or impact here.

Netflix’s quarterly earnings did drop from 86 cents from the same period last year, so going from 86 to 60 isn’t growth or even moving in the right direction, but that was all expected. While this does constrain people’s expectations of a stock, it hasn’t bothered Netflix much, or at least this part of the report didn’t.

What did clearly bother the market is Netflix telling us that while they have added new subscribers, they overestimated this number in their forecasts. While we might think that this shouldn’t make any difference at all if you made more money per share than you said you would, and money is how we keep score in business, this is often not so much about the present as it is about the future.

It’s almost like investors are pointing their fingers at Netflix and saying to them that they lied to us, and it doesn’t really matter if the lie was really that meaningful or not, they are going to pay for this. The price for this lie became set at about $20 billion in fact, around the amount that Netflix lost in the blink of an eye after they shared this news with us.

What is said to be bothering people the most is the fact that, while overall subscribers went up, subscribers in the United States actually decreased, albeit by a very small amount. This caused the stock to plummet by 12% in after-hours trading.

While we might not think that after-hours trading means that much, it actually does, as there is a lot of monkey-see monkey-do behavior in markets. Sometimes we see the so-called overnight traders pound a stock too much and it can recover a good amount during the regular session the next day, these off-hour moves generally do carry over.

Wednesday’s Overnight Plunge May Not Be the End of This

People see the stock down 12% and the same worry that the overnight traders had is also experienced by the session traders, and with this 12% being added to the 5% losses of the last week prior to this, we’re now looking at close to a 20% drop in just 6 sessions. That’s enough to send a lot of traders bailing, which either adds to the downward pressure or at least maintains it.

Netflix is projecting better subscriber growth next quarter, but they of course said that last time and if the projections the last time were off, these next ones may end up being as well.

It may be that the company is underestimating the competition, which has grown larger and is set to grow even larger soon. There are some big names out there now such as Disney, HBO, and Apple to contend with, and this problem will not be going away anytime soon.

Netflix’s success has been rather phenomenal actually when you look at how much of this market they have carved out for themselves, but given how lucrative this has been for them, this was bound to attract some big flies. The increase in the buzzing is well underway now.

The U.S. subscriber numbers tell this story better than anything, and while they haven’t really lost a meaningful amount of them yet, this can be seen as a harbinger of what may be on the horizon, as other services wrestle more and more of their people away from them.

These numbers, therefore, aren’t really about last quarter, they are about quarters to come, and if we see subscribers leaving more and more, this will impact Netflix’s results even though this hasn’t been the case yet, or at least hasn’t been to a level that had them miss earnings expectations.

On the other hand, we could look at this and say that they held their own last quarter in this market, but we do need to ask how much longer they can keep this up without falling behind. Shareholders expect that you will move forward and when you move backward, they will punish you without mercy.

With Netscape’s limited upside here and with some real potential downside from concerns about losing market share to increased competition, it may be wise to worry about Netscape to the extent that people are, or maybe even more.