Why Netflix Stock Is Down Today

Netflix stock, which trades under the symbol (NASDAQ: NFLX), rallied during pre-market trading hours on Wednesday after the company reported earnings that trumped analyst estimates. The company reported earnings per share (EPS) of $0.10 compared to consensus analyst estimate of just $0.02.

Shares of Netflix rallied to trade at about $107 per share, reflecting a 3.7 percent gain in the pre-market trading hours to match the news of the surprise earnings posted. However, in the early opening hours, Netflix stock opened low after falling by more than 5 percent to trade at about $102 per share. While Netflix posted a good bottom line, it failed to impress analysts on the top line.

Netflix posted a revenue of $1.82 billion, which missed analyst estimates of $1.83 billion. However, this reflected a 23 percent growth in top line, which was a good result on a year-over-year basis.

Netflix released its fourth-quarter 2015 results yesterday after markets closed, during which it also revealed the overall business growth in North America and internationally.

The company’s international subscriptions grew by 4.04 million, beating the analyst estimate of 3.5 million. However, U.S. subscriber growth missed estimates, coming at 1.56 million compared to analyst projections of about 1.62 million.

Netflix launched operations internationally early this month, bringing the total number of countries where its services are present is now 190.

Netflix is now available in most parts of Asia, the whole of Africa, North America, and Latin America. However, its services are yet to be launched in China. During the earnings conference call, Netflix clarified the reason why China was not among the countries where it launched early this month.

“We are starting by primarily targeting outward‐looking, affluent consumers with international credit cards and smartphones. As with every market we’ve launched, our approach is to listen, learn and improve rapidly, adding more content.”

While international viewers are happy to welcome Netflix services, the company will need to overcome certain challenges, including limited access to high-speed internet and innate video piracy, in some of the regions where it launched its services.

However, Netflix appears to have developed a strategic plan that will help it identify potential premium subscribers for its new global project. The company is offering to the locals an opportunity to enjoy its services for a whole month without paying a cent. This could play a major role towards the company’s success in the new operational regions. However, just as Netflix said in its most recent earnings call, it will need to add new content in order to remain competitive.

This is because most of the programs currently accessible on Netflix in the new regions are from a couple of years back, which means most people have already watched them.

Nonetheless, Netflix has inked deals with several top content providers in the last few quarters, including partnerships with Epix and Starz, among others. Some of these deals include the supply of original content. As such, Netflix could yet pull the master strokes in some of these regions, which are characterized by perennial content piracy.

Netflix is also producing its own original series and films. Some of these have been ranked among the best shows on the streaming platform by viewers. This could play a major role in the Netflix’s overall business strategy as it weighs on the amount of content it intends to purchase compared to what it produces in-house.

Shares of Netflix are currently priced, at 272x in P/E (price to earnings) ratio for the trailing 12-month period. This compares to the industry average of just about 18x. Analysts expect Netflix to post an EPS of about $0.04 per share for the first quarter of 2016 and about $0.26 for the fiscal year 2016. However, it won’t be surprising if Netflix blows up those estimates again.

[Photo by Paul Sakuma/AP]