Just before Netflix (NASDAQ:NFLX) released its second quarter earnings, I wrote that I thought there might be a buying opportunity created by the resulting market movements. Netflix has always seen sharp movements when it falls short on subscribers, and I thought there was a good chance that one might happen this month.
There was indeed, and Netflix stock did drop by 14% immediately following the news. But is this a buying opportunity, or a real market correction that will not be reversed? I wanted to look one more time at the actual numbers, now that we have them, and see what they say about Netflix's prospects.
Netflix stock cratered because, as I expected, subscriber count came in well below expectations. Three months ago, Netflix was projecting a net addition in the US of 700,000. Meanwhile, experts had pegged the increased churn from the un-grandfathering of long-time subscribers at 500,000 in aggregate, not all of which should have been in the current quarter since the hikes are being staggered over the remainder of the year. At 160,000 instead, that means Netflix saw more cancellations in one quarter from the price hikes than was predicted for the whole year. Projecting that number out over the rest of the year would put cancellations from the hike at well north of 2 million.
Netflix itself seems to have admitted this, if only implicitly. It cut its expectations for the current quarter from 800,000 to 300,000.
Beneath The Surface
As I said, though, I think investors should look at the numbers a little deeper. Assuming that the 800,000 missing subscribers would all have been paying at the $10 rate for the standard plan - which seems logical, since grandfathered subscribers have no reason to cancel before their benefit actually expires - then Netflix should have been missing $8 million per month. Since the hikes didn't take effect until May 9th, and some were staggered in even later than that, let's call the expected shortfall somewhere around $12-$15 million.
But now look at actual revenue. While subscribers came in 800,000 short, revenue came in only $5 million short of expectations. That is somewhere between one-half and one-third of the shortfall that should have been expected.
What's more, that shortfall isn't even attributable to the streaming segment of the company. Netflix's total streaming revenue came in $2 million higher than it projected at its last earnings call. A $2 million shortfall in the US segment was balanced out by a $4 million beat in the international segment, despite the fact that the international segment actually fell further short of subscriber projections that the US segment did.
Of course, the international business can be affected by forex movements which can distort the US dollar picture. But even if we focus solely on the US segment, a 540,000 subscriber miss came to only $2 million in missing revenue. That is less than $4 missing per missing subscriber. Less than one month's fees even at the old rate, and these results are for the whole quarter.
As I explained last week, I think there is a simple explanation for this. Some of those "cancellations" actually represent consolidation of accounts into the higher Premium plan, which offers twice as many simultaneous streams as the Standard plan. When two accounts consolidated their Standard plans into one Premium plan, monthly revenue that was projected to increase from $16 to $20 fell to $12 instead. But that is still better for Netflix than a straight up cancellation, which would reduce monthly revenue by $8 each.
Ultimately Netflix, like any other company, profits from having more revenues than costs. Subscribers are certainly a useful metric to track, and I don't mean to belittle those who track them. But a 14% selloff on a stock that hits 99.8% of its revenue target and actually beats its cost and profit margin targets seems to me wholly unjustified. Netflix has already recouped about half of its losses, and anyone who bought the dip as I recommended is already up 8%, not bad for one week. But I suspect there is still some upside left. It wouldn't surprise me to see Netflix return to its former position over the next few weeks at $99. I still see the stock as a short-term buy, despite its longer-term challenges.
Disclosure: I am/we are long NFLX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.