Netflix Earnings Stun Market
Netflix (NASDAQ:NFLX) has stunned investors with its earnings report - and not in the way that is crushing the stock like in the last few quarters. Shares are up some 20% in after-hours trading after the company beat on earnings per share and revenue expectations.
Subscriber growth was at the heart of its previous declines. Not only were current results coming in below expectations, but guidance was too. This quarter, consensus called for 300,000 net new subscribers to be added in the U.S. and 2 million to be added internationally.
Netflix reported 370,000 net new subs in the U.S. - pretty good - but 3.2 million internationally, crushing expectations. The company now boasts more than 86 million subscribers and Netflix expects to add 3.75 million global subscribers next quarter. Importantly, we got an update on China as well:
"The regulatory environment for foreign digital content services in China has become challenging. We now plan to license content to existing online service providers in China rather than operate our own service in China in the near term. We expect revenue from this licensing will be modest. We still have a long term desire to serve the Chinese people directly, and hope to launch our service in China eventually."
So what did investors miss? Simply put, many were far too negative. I was looking into Netflix over the weekend and there was an overwhelmingly large amount of pessimism surrounding the company. Come Tuesday, I'm not sure how much of that negatively will remain.
Just the other day, we looked closely at a teen study, which showed what young people prefer. Cable is slipping further and further down the list, but Netflix was the top preferred choice of media consumption. It begs the question of, what is the future?
By this study and by other current competitors, who is to challenge a company like Netflix or Amazon (NASDAQ:AMZN)? Some investors complain of valuation. But if market share continues to grow and competitors continue to shrink, we could be looking at the future. Without a question.
Is it a guarantee that Netflix and Amazon will be here in 20, 30 or 50 years? No. Because we don't know what will change between now and then. But could one envision a future where they are the leaders in their respective categories? Absolutely - and that's why the valuations are so high.
Project Titan Down?
New reports suggest that Apple (NASDAQ:AAPL) is doing some serious rethinking with its automotive plans. Essentially, the company will keep working on its goals, after reshuffling its team once more, and will decide if it's a business worth pursuing by sometime next year.
Unlike Alphabet, (NASDAQ:GOOGL) (NASDAQ:GOOG) which is relatively open about its self-driving plans, Apple is not quite an open book. Nor has it ever been. Rumors were floated earlier this year that the company was considering buying McLaren, maker of super high-end vehicles, but that notion had quickly died.
I had made the case before that purchasing an auto company, while a huge undertaking, would be one of the best ways to make sure a company like Apple or Google succeeded in putting its technology on the road. That includes buying companies like Tesla (NASDAQ:TSLA) or even certain brands/lines from others, such as Fiat (NYSE:FCAU) or Tata Motors (NYSE:TTM).
While this may seem extreme, think about it for a minute. Designing and manufacturing a new vehicle from scratch is a massive job. Just look at how much Tesla has struggled - and that's with a leader that can seemingly raise money with a wave of his wand.
Buying companies with the infrastructure in place won't be cheap, but they will save time. You may wonder though, why a company like Apple or Google would need to do this, right?
The alternative to building cars would be to make the self-driving technology behind it. But Google and Apple (presuming the latter is even working on it) better have the best damn programs on earth if they are going to bank on the licensing aspect.
For licensing to pay off, Apple, Google and any others relying on software integration, will also have to rely on the concept that Ford (NYSE:F), GM (NYSE:GM), Mercedes (OTCPK:DDAIF), Tesla (TSLA) and nearly every other automaker will go with technology developed from another company rather than their own.
Said another way, Ford, GM and others will essentially have to scrap all of the work they've done in self-driving technology to use Apple or Google's. So while licensing seems more attractive, it also has roadblocks in the way, because it seems unlikely that many of the major auto players will abandon their hard work in favor of someone else's. Unless, like we said, it's that much better.
So does that put automakers on the M&A block?
Tesla, Panasonic and Mystery Products
Speaking of automakers, Tesla is again making news on Monday. The company, which many were anticipating would release a new product today, has decided to push that release back by a few days. Instead, CEO Elon Musk is shooting for Wednesday.
One caveat though, is that the deal is contingent on Tesla closing the deal to acquire SolarCity (SCTY). If that deal does close, then "Tesla will use the cells and modules in a solar energy system that will work seamlessly with Powerwall and Powerpack; Tesla's energy storage products."
As many already know, Tesla has a very divided bull-bear camp. People either think Tesla is the "next big thing" or it's going to zero. So which is it? While it's hard to say Tesla is the next Amazon per se, one can certainly envision a world where the company is producing a steady volume of electric vehicles, while also selling Powerpack and solar packages to customers.
My question is, can the company get to that stage and can it do so profitably? At least, can it generate enough cash flow to cover the costs on its own without continually raising more capital?
This particular Panasonic deal is, in management's mind, a way for the company to cut its costs in relation to its solar business, (under the assumption it acquires SolarCity). If it does, wanting lower costs makes sense; that much is true for any business.
When I picture Tesla, I envision a company that can be revolutionary. However, that revolutionary company doesn't have an easy walk. It's got a tightrope that it has to navigate across. Losing its balance is okay. We see that all the time from Tesla, ranging from production delays and vehicle setbacks to controversy over its CEO and Autopilot program.
While a loss of balance is okay, a stumble would be fatal. If the company massively dilutes its shareholders or needs to raise billions upon billions of dollars, there will be trouble. If Tesla and SolarCity combine, and continue losing more money than they make, there will be trouble.
The "if this" and "if that" can go on for ages.
But if the company can start to turn towards profitability and/or positive cash flow, it will have a much easier time convincing Wall Street it will succeed.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
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