Netflix (NFLX.US) released its Q2 earnings report on Tuesday after the close of the US session. Release turned out to be mixed. On one hand, the company managed to surprise with new subscriber figures. On the other hand, guidance for the future period was perceived as lacklustre. As a result, stock moved lower on Wednesday. Let's take a closer look at earnings from Netflix.
Revenue beat and earnings miss
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Create account Try a demo Download mobile app Download mobile appNetflix reported a 16.5% year-over-year increase in total revenue, to $7.34 billion. This was a slightly better reading than the market expected ($7.32 billion). Cost of revenue increased 10.3% during the period, signalling that the company's cost management has improved. Company's operating expenses remain flat compared to a year ago, allowing operating profit to increase 36% year-over-year. While pretax income was 50% higher at $1.593 billion, the company reported tax provisions of $240.77 million, down from $315.4 million in Q2 2020. Higher sales, better cost efficiency and lower taxes led to an almost 90% YoY increase in net income to $1.353 billion, or $3.05 per share. This turned out to be a slight miss as the market expected an EPS of $3.14.
Solid subscriber addition
While revenue and EPS are "classic" highlights of earnings reports, investors often focus on more company-specific measures. The most closely watched measure in case of Netflix is subscriber growth. Company was expected to add a net of 1.12 million subscribers during the second quarter of 2021. However, the earnings report showed an addition of 1.54 million subscribers (net)! That's a big beat. Nevertheless, the company's stock failed to rally on Wednesday and dropped over 3%. Meanwhile, S&P 500 added 0.82% and Nasdaq gained 0.92%. Disappointing guidance for the future quarters can be seen as a prime reason behind lacklustre share performance. Netflix said it expects to add 3.5 million subscribers in Q3 2021. Market expected an addition of 5.86 million subscribers in the July-September period.
What's next?
Market reaction hints that beat in revenue and subscriber numbers for Q2 2021 was not enough to offset a big miss in Netflix guidance for Q3 2021. Analysts projected large additions in subscriber numbers in the third quarter of the year as Netflix is expected to boost its offering with new series and movies. However, the company's management seems to remain upbeat. Netflix said that should it meet its forecast it will have added 54 million subscribers over a period of 24 months, which would be in-line with the company's pre-virus pace of additions. Moreover, the company is making efforts to branch out of its traditional streaming business. Netflix has launched an online shop selling merchandise related to its content. Apart from that, Netflix is also entering a gaming market and will start offering mobile games to its subscribers. Company also hopes that launching a video game offering will help it gather more data on its customers and therefore target its streaming offering more precisely.
Technical situation
As we have mentioned earlier, the share price of Netflix (NFLX.US) dropped over 3% on Wednesday in response to the earnings announcement. The move, however, fits into the overall technical landscape on the chart. Stock has been pulling recently following a failed attempt of breaking above the upper limit of the trading range at $555.00. Yesterday's drop was halted near 23.6% retracement of the upward move launched in the second half of 2019, which also marks a mid-point of trading range. The area is additionally strengthened by 50- and 200-session moving averages. Should declines continue and the stock breaks below this zone, a move towards the lower limit of the range at around $470.00 will become the base case scenario.
Source: xStation5
