Shares of Netflix (NASDAQ: NFLX) 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.
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.
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