Yesterday Netflix announced earnings, and while the earnings were fine, the company forecast another quarter of no subscriber growth. Look at how the stock fell 75% the last 3 months from $300 to $77. It’s remarkable to see a company with profits rising fall so quickly. But it was rare to see such a large company with a PE of 80.
Sixteen months ago I did my first analysis of Netflix stock as Netflix pushed past $80 a share, and I thought that was too high. I like to look at a subscription company based on what I think the future no-to-low growth state will look like for them. My expectations were between 20-25% of the population subscribing, at $15-$20 in profit from each. The fact that they don’t have control over their costs makes it impossible for profit to rise above $20, and since costs were likely to rise, I didn’t think they’d get more than a quarter of the population. Thus the best case scenario for them was to double over many years, which left me uninterested.
Just over a year ago I sold short at $166 after it had already doubled. The next couple quarters really surpassed my expectations of subscriber growth, but the market just got carried away, forecasting continued growth into the future. I held it all the way up to $300, and all the way back down to $152, where I was happy to dump it. They’ve certainly grown faster that I (anyone) expected, but without any growth in profit per customer.
Looking forward, now that they’ve raised prices, their ppc will rise, but at the expense of subscriber growth. At next quarter’s earnings it will be interesting to see how their increased fees translate into profit growth. Currently they’re at 22% of the US population, and $10 in profit from each. If 10M people pay $15 more in the quarter, assuming fixed costs, that would triple their earnings, and give them an amazing $30 in profit per subscriber. But why weren’t the current quarter’s earnings higher, and are their current costs fixed?
Long-term, the answer is a resounding NO. But short term, I wouldn’t be surprised to see their profit explode. I’m going to dig into this a little deeper, and I’m definitely considering a purchase.
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