By Joyce Yu
Philadelphia, PA–Netflix stocks slumped as much as 14% on open today after reporting weaker-than-expected subscriber growth, but quickly recovered in the afternoon session. The streaming company said it added 5.2 million subscribers last quarter, falling short of about 1 million customers than it had expected.
Nevertheless, Netflix’s Q2 financial are still strong with $384 million in profit, a six-time growth from a year ago, and $3.9 billion in sales which jumped 40%. Amongst all, the company’s miss on international subscriptions is particularly concerning, an area where Netflix is trying to grow the most. In a letter to shareholders, Netflix said it had “a strong but not stellar” second quarter. Despite earlier loss of 14%, loss in Netflix stocks narrowed later the day to 4%.
Closing at $400 a share yesterday, Netflix is an extremely expensive stock, commanding a Price to Earnings ratio of 237 times, much higher than industry average. The S&P 500 currently trades at 22 times earnings, and the average media industry stock is worth just 14 times earnings.
Against intensified competition, several analysts voiced concerns last week. In his report, UBS analyst Eric Sheridan thought investors were ignoring the risk that rivals could eat into Netflix’s share, slashing his target price on Netflix from $425 to $375. He further noted in a report published after earnings that investors “will likely hit the pause button.” Instinet analyst Mark Kelley also said he was worried about the increased competitive landscape.
Netflix has no doubt enjoyed first-mover advantage, but other competitors are ramping up their efforts too. AT&T, which now owns HBO, Warner Bros. and CNN, is set to be major threat to Netflix’ dominating market position. Disney which is expected to launch its online streaming service in 2019, will also inherit Fox’s share of Hulu if that deal to acquire movie studio assets of 21st Century Fox goes through.
Fang stocks – Facebook, Amazon, Netflix and Google – all rebounded after initial loss, driving Nasdaq to record high. “For the FANG stocks, it will be a tough day,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “They were the poster boys for outperformance and when you get outperformers like these guys, that drives up valuations. When the valuations are this high, there is no room for error.”
Tech has been the best-performing sector in the market this year, contributing more than 80% of the S&P 500’s gains this year. The lack of strength in the overall market except tech, however, is a signal that the stock market is not as healthy as it looks. BlackRock CEO Larry Fink told CNBC, “If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling.”
