Netflix (NFLX) reported second quarter numbers after the close Monday that beat consensus EPS expectations of $1.11 by 15 cents, coming in at $1.26. But the company gave some third quarter guidance that was generally below the analyst outlook.
The stock had finished the regular session up nearly $5 (1.8%) to $281.53. In after hours trade, shares were down nearly $24, over 8% after disappointing on revenue expectations with $788.6 million vs. the view by the street of $791.5 million.
Hey-Days Over?
But the real damage was done by the guidance message from the company, which was basically one of a leveling-off in growth. After many quarters of rapid subscriber growth for its DVD postal and streaming services — the company added 1.8 million subscribers in the most recent quarter to end June with 25.6 million — it looks like the heydays are slowing down.
The company sees revenue of $780 million to $805 million for the current quarter, and EPS of 72 cents to $1.07 per share. Analysts had been looking for something closer $846.5 million and $1.10 EPS.
In addition to not being able to sustain that subscriber growth, the company commented on current subscriber discomfort with price increases, which could be rising as much as 60%. This may be a hyper-growth company about to experience its biggest challenge in continuing to sell its never-look-down story to investors.
Still Worth 60 Times EPS?
As of Monday’s regular close near $280, the stock was trading at a forward P/E multiple of 60 times. This seems outrageously pricey to value investors, but when you consider the 50% annual earnings growth of the company based on the past year’s results and current projections going into next year, you can see the appeal for momentum and growth investors.
We will know more about what these investors are willing to pay for that growth in the coming week as analysts chime in with their revisions to earnings estimates. In the past 90 days, full-year EPS estimates for 2011 had risen from $4.45 to $4.56 and 2012 projections rose from $6.33 to $6.70.
The Ten-Bagger That Got Away
These numbers are sure to come down and the highest of high flyers that was Netflix for the past two years may have a rough landing for the next few trading sessions as all this gets sorted out. Whether or not the party is over, it was an extremely profitable ride for investors who knew how to follow earnings momentum.
Yet very few had the courage to stick with those clues. For details on how the Zacks Rank kept many investors in the stock for anywhere between five and ten times their initial investment, see my analysis from last week "Why You Still Buy the Dips on Earnings Machines."
Kevin Cook is a Senior Stock Strategist for Zacks.com
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