There is no denying that Netflix, Inc (NASDAQ:NFLX) stock has been through a tough year. Its shares remain under pressure, having lost more than 20% over the last 52 weeks and 15% since January 1, significantly underperforming the broader market. The question shareholders are asking is whether this is a momentary weakness or a chronic problem.
It is important to note when answering that question that despite the setbacks in the last 12 months, over the past two years Netflix shares have gained more than 106%, and are about 50% higher than the S&P 500 index or the Nasdaq Composite. Secondly, and most importantly, one should gain an understanding of what went wrong in Netflix’s most recent quarter, which wasn’t all bad but yet sent its shares plummeting some 16%.
The U.S. streaming giant missed Wall Street’s subscriber growth estimates by adding 160,000 subs in the U.S., its lowest level in more than a year, and 1.52 million internationally. Netflix had said in April it expected to add 500,000 members domestically and 2 million from overseas. This news overshadowed what the market completely ignored, which was the fact the company still managed in the second-quarter, historically its weakest, to not only increase its membership count, but also earn $0.09 per share, well above the $0.02 per share analysts were expecting. Revenues also came in higher, surging nearly 20% year-over-year to $1.97 billion. So no matter how one looks at these numbers, the reality is Netflix still delivered continued earnings and subscriber growth in Q2.
While any long thesis on Netflix stock should objectively assume concerns about growing competition, slowing subscriber growth and the company’s cash burn, many investors remain bullish on the stock believing growth trajectory will improve at some point as the current obstacles the company faces are seen as short-term headwinds.
Netflix CEO Reed Hastings seems to agree with that assessment. Last month he apologized for the stock’s volatility, saying “I know it’s not easy on everyone. The big picture is very much intact and we’re very excited about it, so we’re continuing to execute on growing the business.”
Institutional Investors are Sticking with Netflix
Yahoo Finance reported ten investment firms with one percent or greater stake in the company as of March 30 and June 29, 2016:
- Viking Global Investors, L.P. owned more than 8.05 million shares, or 1.88% of Netflix stock as of March 30, worth about $823 million.
- SRS Investment Management, LLC owned 10.35 million shares, or 2.42% of Netflix stock as of March 30, worth about $1.05 billion.
- BlackRock Institutional Trust Company, N.A. owned 10.8 million shares, or 2.54% of Netflix stock as of March 30, worth about $1.11 billion.
- Jennison Associates LLC owned more than 13.3 million shares, as of June 29, 2016, or 3.11% of Netflix stock, worth about $1.22 billion.
- State Street Corporation owned 16.34 million shares, or 3.82% of Netflix stock as of March 30, worth about $1.67 billion.
- Price (T.Rowe) Associates Inc owned more than 17.38 million shares, or 4.06% of Netflix stock as of March 30, worth about $1.77 billion.
- Tiger Global Management, LLC owned more than 17.9 million shares, or 4.20% of Netflix stock as of March 30, worth about $1.83 billion.
- FMR, LLC owned more than 20.74 million shares, or 4.84% of Netflix stock as of March 30, worth about $2.12 billion.
- Vanguard Group, Inc. owned more than 24.56 million shares, or 5.74% of Netflix stock as of March 30, worth about $2.51 billion.
- Capital Research Global Investors owned more than 49.2 million shares, or 11.49% of Netflix stock as of March 30, worth about $5.03 billion.
The key consideration for investors that want to own Netflix shares should be the company’s strong position for continued growth, particularly when looking at its international operations. Although Netflix’s international markets are still unprofitable due to expansion metrics, its international segment is forecast to break even by fiscal-year 2017 and start having a positive contribution margin as sales will exceed variable costs from FY 2018 onward. If Netflix focuses less on net earnings and more on driving sustainable growth over the long term, then look for the name’s gains to continue.