Netflix Earnings Disappoint, Investors Sell the Stock

on Oct 22, 2020
Updated: Dec 19, 2022

Netflix had a terrific winning streak since it became a public company several years ago. It delivered over 1,880% return to its investors, one of the most impressive returns in a decade. 

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Since the pandemic forced people to stay more at home, Netflix took another leg higher. After all, consumers spent more time online, and the streaming network benefited from it.

Moreover, it invested heavily in its own TV shows in the last years, and the results were paying off. There is still more down the line, and the Q3 earnings reveal a healthy picture for the company.

So why did investors sell the stock?

Netflix Q3 Earnings Details

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Streaming pay membership grew by 25% while the company added 2.2 million net memberships in the third quarter. This is one of the big misses on the report, as 2.2 fell short of the 2.5 million offered by Netflix in its previous guidance.

The paid net adds growth also slowed. This was somehow predictable but the size of it took markets by surprise – almost three times when compared to the same period in 2019. This comes in the context of the company adding more new members to the network in the first nine months of the year when compared to the same period in 2019.

However, only adding members does not automatically mean that they will transform into long-term paid customers. It is one thing to attract new members and another one to retain the old ones. Therefore, the retaining rate is as important as the rate of attracting new members.

While the low subscriptions addition seems to be the reason for investors ditching the stock, the Q3 also posted some impressive results. For instance, a strong free cash flow position. This is crucial for a company focused on growth and producing its own content, as it can self-finance both.

As a global streaming entertaining service, Netflix faces fierce competition lately. Disney+ is the last giant name that joined the online streaming services industry, and that might be an explanation for the lower number of new memberships added by Netflix in the third quarter.

Analysts still like Netflix. The main reason for this comes from the extraordinarily strong free-cash-flow position, something that not many companies can brag about lately. In other words, analysts are brushing off the subscriber count and focus on the free-cash-flow to the firm.

Will investors do the same?

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