The 2020 pandemic demonstrated how tech companies can outlast and outperform most other stocks due to their business model. Companies such as Netflix thrived from the lockdown that got millions of people stuck inside their homes, in front of the TV or their computer.
Netflix benefited the most from the COVID-19 pandemic. The second-quarter earnings report showed a year over year revenue increase of 25%. These performance results were a direct consequence of 10 million new paying subscribers. The best analysts estimated earnings of $6.08 billion but Netflix exceeded expectations with reported revenue of $6.15 billion. Even Netflix underestimated their results by anticipating a gain of just 7.5 million subscribers for the second quarter.
Despite all these achievements, Netflix stocks tanked following the Q2 results.
The earnings per share failed to meet or exceed expectations. Netflix stocks earned only $1.59 per share while the estimated earnings per share were $1.81. At the same time, Netflix made a rather disappointing announcement for the Q3 targets as they expect to gain only 2.5 million new paying subscribers.
Following these announcements, analysts reduced their earnings per share estimates. This suggests that Netflix may not be able to sustain a linear growth and will underperform in Q3 and Q4. All these aspects created doubt amongst investors, leading to some significant market moves, driving the share price down following the Q2 earnings report and analyst reports.
Should You Be Concerned?
Even if Netflix will slow down its growth and underperform in Q3 and Q4, the company still improved some of their spending. Q2 marketing costs declined by 28%, compared to $603.1 million in Q2 2019. Sadly, this improvement was outweighed by an increase in their administrative costs by 23.4%.
Net income soared from $270.6 million in Q2 2019 to $720.2 million in Q2 2020. This net income forecasts sustainable Q3 and Q4 results. Netflix still has room to grow and its earnings report does have plenty of positive indicators.
The bullish momentum driven by investors in the context of the COVID pandemic made Netflix almost immune to stock market crashes. This confidence built by investors is very fragile. Any reason for doubt will result in large market moves with more investors selling rather than buying. When expectations are too high, any deviations will be much more impactful than what a company like Amazon would experience.
The Thing To Take Home
Netflix should not be ditched following the Q2 earnings report. Goldman Sachs still maintained its Buy rating for Netflix and despite its ups and downs. YTD, Netflix stocks grew by over 50% and there is still room to grow. Netflix has not tapped yet into all markets. While the US market is saturated and competitor platforms increased in numbers, the emerging markets still offer room for growth in subscriber numbers and net revenue.
Even if earnings per share estimates were adjusted to be more in line with the trend set by the Q2 earnings, analysts reconfirmed their revenue estimates. On top of these estimates, the share price target for Netflix is in line with the vast majority of analysts, suggesting that the intrinsic value of Netflix is on an improving trend.