Wall Street is right to disregard a rare loss of profits from streaming king Netflix.
Netflix (NFLX) shares exploded 13% in the pre-market on Wednesday, indicating that the shares will open at a record high, despite falling profits on Tuesday night. To be sure, the report had a lot of material for Netflix bulls to face bears that roared about losing profits.
The company surpassed 200 million subscribers for the first time, driven by a world that continues to consume large amounts of content at home during the COVID-19 pandemic. Meanwhile, the gross figures for the quarter suggest that Netflix did not see subscribers hesitating in its latest price increase in October.
“It is important to note that while Netflix has exceeded subscriber expectations in all major territories, Netflix’s more mature market, USA / Canada, reported materially better than expected, almost +900 thousand new net subscribers (compared to ours expectation of + 375 thousand), which highlights that the final penetration for NFLX services globally could be higher than expected, ”said Pivotal Research Group analyst Jeff Wlodarczak.
See how Netflix fared in the quarter.
-
Liquid sales: $ 6.64 billion versus $ 6.63 billion estimate
-
Diluted EPS: $ 1.19 against $ 1.36 estimate
-
Global paid subscriber additions: 8.51 million versus expected 6.03 million
But go deeper and you’ll understand why Wall Street is perhaps more excited about Netflix’s history than it was some time ago. The company reached its triple-day profit on bullish indicators.
First, Netflix achieved an operating margin of 25% in the first quarter. This would be a significant increase from the already impressive 14.4% rate in the fourth quarter. Netflix’s highest operating margin in 2020 was 22.1% in the second quarter. The Wall Street reading: as expected, the combination of a materially higher base of subscribers who pay more for a service is leading to higher profits.
Netflix didn’t stop there. He added this nugget in the earnings release “we believe that we no longer need to raise external financing for our day-to-day operations”. The company also increased its cash flow projection for 2021 by $ 1 billion, to break-even. Considering that Netflix’s business model has long required debt to operate, this improved perspective of free cash flow is being adopted by bulls.
“Netflix has been working at this point for several years and is now in a unique position to continue its aggressive spending on content while still generating significant future cash flows,” said Jefferies analyst Alex Giaimo.
The last sweetener of the quarter: Netflix has signaled that it can resume stock repurchases soon, as it did from time to time from 2007 to 2011.
Giaimo continued, “Although the 4Q sub-beat will draw most of the attention, we believe that the best comment on free cash flow and future capital independence is the most important positive result.
And you thought “Cobra Kai” was the reason for the enthusiasm of Netflix’s actions. Do not.
Yahoo Finance Technology Editor Dan Howley contributed to this story.
Brian Sozzi is a general editor and anchor on Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi is on LinkedIn. Julia La Roche is a correspondent for Yahoo Finance. follow her Twitter.
Sign up for the Yahoo Finance Tech newsletter
What’s new with Yahoo Finance:
See Yahoo Finance’s live schedule at Verizon FIOS 604 Channel, Apple TV, Amazon Fire TV, Roku, Samsung TV, Pluto TV and Youtube. Online get Yahoo Finance at Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedInand reddit.