Why Netflix Inc (NASDAQ: NFLX) stock is under pressure

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Netflix Inc (NASDAQ: NFLX) stock lost over 9.1% on July 17th, 2020 pre-market session (Source: Google finance) on weaker than expected outlook. Management sees less growth for the second half of 2020 as compared to the prior year. The group expects 2.5m paid net adds for the third quarter of 2020 as compared to 6.8m in the prior year quarter. They are expecting paid net adds to fall year over year in the second half. The firm sees quarter-to-quarter fluctuations in paid net adds as compared to third quarter of 2019 which had positive impact from new seasons of both Stranger Things and La Casa de Papel (aka Money Heist). For the full year 2020, the group is still targeting a 16% operating margin while forecasting 19% for 2021. Another driver for hurting the investor sentiment is its 2021 production are expected to face paused productions which would lead to a more second half weighted content slate in terms of the big titles.

Netflix World Headquarters

For the second quarter of 2020, the group’s revenue rose 25% on a year over year basis, while quarterly operating income exceeded $1 billion. The Average streaming paid memberships surged 25% year over year while streaming ARPU rose 0.4% year over year as ARPU was hurt by $289 m from foreign exchange (F/X) fluctuations. The firm’s Operating margin expanded 770 basis points year over year to 22.1%, which is better than expected membership and revenue growth. Content and marketing expenses were lower than forecasted leading to an EPS of $1.59 as compared to $0.60 in prior corresponding period including a $119m non-cash unrealized loss from F/X remeasurement on their Euro denominated debt and a $220m non-cash valuation allowance for deferred tax assets (due to recent legislation limiting the use of California R&D credits).

Netflix added a record 10.1m paid memberships during the second quarter as compared to 2.7m in the same period of last year. This is well above their 7.5m forecasts leading to 26m paid memberships during the first half of 2020. But Management warns slowing growth as consumers get through the initial shock of Covid and social restrictions.

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