There was a lot to like in Thursday afternoon’s report, but the title still fell. Let’s review three reasons why a second trimester rash was not enough.
1. Orientation was weak
In retrospect is a big part of every financial update, but it often plays the second role in the future. The third quarter is going to be difficult for Netflix. It hit a record 25.9 million more members than it lost in the first half of 2020, but it models only 2.5 million net additions for the current quarter.
The pandemic has accelerated registrations on Netflix, causing new registrations in the first half of the year that otherwise would likely have occurred later in the year. We saw the opposite scenario occur last year, as a sharp increase in monthly rates at the start of the year delayed new registrations in the second half of 2019.
It’s not just the pace of new viewers that will slow down. Netflix’s 20.6% year-over-year revenue forecast for the current quarter would be its weakest revenue gain since mid-2013. Even though Netflix is cautious with its forecasts, forecasts of its short-term performance are weak, even by historical low standards.
2. Two corner desks
CEO Reed Hastings is ready to share the bar. One of the biggest headlines in Netflix’s second quarter announcement is that creative director Ted Sarandos has been named co-CEO. He was also added to the board of directors.
It is not necessarily a bad thing. Sarandos is clearly the second most prolific rookie on Netflix, and he would be the favorite par excellence to be his new helmsman if Hastings were to retire or enter the political arena. It’s probably surprising that the guy responsible for Netflix’s success on the content front was not already a voice in the meeting room. However, the decision to see Sarandos share the CEO’s office with Hastings suggests that Hastings is already considering a secession strategy – even though he mentioned that he has no plans to leave Netflix anytime soon.
3. Hot stocks strengthen expectations
Bullish momentum is good for investors, but it also gives a company a small margin of error when it climbs the financial podium. Netflix stock – up 62% from the start of the year and up 21% since the release of its first quarter results – contained a lot of helium before this week’s update.
It will always be a great year for Netflix. It is expected to reach 195 million paying paying members worldwide by September, and it will be a record year for most measuring sticks. History will probably regard the promotion of Sarandos as a very positive decision. Thursday’s report was not perfect, but Netflix continues to be one of the strongest growth stocks in the market.