Netflix, Inc. CEO Reed Hastings concluded last earnings call in July, saying “We apologize for the volatility.” It’s unusual for corporate executives to utter these words, but Hastings had to say this because of the sharp moves that had buffeted Netflix’s share price.
Netflix stock volatility
Netflix stock has remained down by more than 10% this year. Some of it is due to the fact that the stock gained a lot last year and reached almost double the price, making it top performer on the S&P 500. Hastings said the rally was a mystery for him. Many other observers too think the same way as Hastings.
Netflix, Inc. is a public company since last 13 years, and in 10 of those years, its shares have swung up or down by at least 10%. Five annual gains of more than 100% each are included in those as well, notes The WSJ. These sharp gains are accompanied with a still “nosebleed earnings multiple” and a marked slowdown in its key market.
Global expansion not very fruitful
All of these, have given rise to concerns whether it’s time for the company to pull back more. The earnings report releasing Monday is unlikely to allay them, notes The WSJ.
Analysts polled by FactSet estimate that the company will report an EPS of 6 cents for the Q3, lower by a penny from last year. They also expect to see a rise of 32% in the revenue. However, a keen eye is to be kept on two important numbers – ‘subscriber growth’ and ‘churn rates’ – with the latter referring to the number of people canceling the service.
As per the WSJ, none of them is showing a move favorable to Netflix.
Netflix launched its services in more than 130 countries in January, but the global expansion did not yield the expected results. Netflix’s US subscriber growth has also been disappointing recently. Net domestic subscribers added in the Q2 were just 160,000, well below the prior forecast of 500,000.
For the Q3, the streaming giant expects to make 300,000 net U.S. subscriber additions. At present, Netflix has 47.1m U.S. subscribers, far from its long-term goal of having 60m to 90m domestic subscribers.
To many challenges
Netflix’s subscription prices are going up, and the competition is also getting intense as Amazon, Hulu and others offer improved services and features. Both these factors lead some analysts to believe that the firm might not be able to achieve the target. In July, Hasting said the higher service cancellations are an outcome of the increased prices for existing subscribers.
So, Netflix, Inc. is with major challenges – slow growth, more competition, higher than expected churn. This has made the stock’s rich valuation of over 100 times projected earnings look particularly unappealing, notes The WSJ, warning “Don’t binge on this stock.”