As I write this, shares of video streaming giant Netflix, Inc. (NFLX) are plunging 9%. While last night’s second-quarter report beat analysts’ bottom-line expectations, there was one line item that spooked investors. What caused the selloff? Is the dip a buying opportunity or a sell signal? Let’s find out.
Let’s start with the bad news. Netflix added fewer subscribers than expected during the second quarter. Netflix added 670,000 subscribers in the U.S. and 4.47 million subscribers internationally. Those were solid numbers, but they were well below analysts’ expectations for 1.23 million subscribers in the U.S. and 5.11 million subscribers internationally.
For the third quarter, Netflix is looking to add five million subscribers, below analysts’ forecasts for six million. The company expects 650,000 new subscribers in the U.S. and 4.35 million subscribers internationally. Clearly, Wall Street is concerned about Netflix’s growth trajectory, as Amazon, Hulu and other video streaming services want to cut into Netflix’s market share.
This is what’s weighing on NFLX shares today. But there’s also good news.
Despite the weaker-than-expected subscriber additions, Netflix topped analysts’ earnings estimates for the quarter. Second-quarter earnings per share surged 467% year-over-year to $0.85, up from $0.15 per share in the same quarter a year ago. Analysts were expecting earnings of $0.79 per share, so Netflix posted a 7.6% earnings surprise.
Second-quarter sales increased 40% year-over-year to $3.91 billion, compared with $2.79 billion in the second quarter of 2017. This fell just shy of analysts’ expectations for $3.94 billion.
Yes, it’s disappointing that Netflix didn’t add as many subscribers as anticipated. But this was still a strong quarter for Netflix, and I think investors used the weak subscriber growth as an excuse to take some profits off the table. After all, NFLX has been on an absolute tear this year.
I currently recommend NFLX in my Accelerated Profits newsletter, and we’re currently sitting on a nice 128% gain in the position. I expect that the stock will move higher from here. For the current quarter, analysts are still forecasting 151.7% earnings growth and 38.4% sales growth.
The bottom line is that I think today’s pullback will be short-lived. Clearer heads will prevail and NFLX will bounce back. I view this dip as a good buying opportunity. NFLX is an A-rated Strong Buy.