Why Netflix Shares Plunged After Beating Earnings Target

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Netflix Inc. (NASDAQ: NFLX) reported second-quarter 2016 results after markets closed Monday. For the quarter, the video distribution company posted diluted earnings per share (EPS) of $0.09 on revenues of $1.97 billion. In the same period a year ago, the company reported EPS of $0.06 on revenues of $1.48 billion. Second-quarter results compare to the Thomson Reuters consensus estimates for EPS of $0.02 and $2.11 billion in revenues.

In the company’s letter to shareholders, Netflix says U.S. streaming subscriber numbers grew to 46 million. Internationally, streaming subscriber numbers grew by 1.99 million to 33.89 million. Total subscribers now number 83.2 million, up by more than 1.5 million sequentially and about 17.6 million year over year.

Sequential U.S. subscription additions of 290,000 was far below a consensus analysts’ estimate of 532,000. International additions were expected to rise by 2 million sequentially. Analysts and investors still consider subscriber additions to be the company’s most important metric. The consensus estimates, by the way, were the same as the company guided when it reported first-quarter results.

For the third quarter of 2016, Netflix expects to add just 400,000 new paid subscribers in the U.S and 2.1 million internationally. Margins in the U.S. are expected to rise 0.8% in the third quarter and internationally the company expects the second quarter’s net loss of $69 million to widen to $95 million.

Netflix continues to believe that it can attract 60 million to 90 million U.S. streaming subscribers and that it can “run around break-even on a net income basis in 2016” and turn a “material” profit in 2017 and beyond. To achieve that, the company said, it plans to reduce international losses and grow U.S. profits. A worthy goal, but perhaps not easy to achieve with continuing competition for entertainment dollars and eyeballs in the United States.

The company’s DVD service counted 4.5 million customers at the end of the first quarter and $71 million profit.

Netflix shares are down about 16.2% in after-hours trading, at $82.60 in a 52-week range of $79.95 to $133.27. Shares closed Monday at $98.81. Thomson Reuters had a consensus analyst price target of $116.47 before the report.

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