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Nice Earnings Report, Netflix: So Why Is Your Stock Taking a Dive?

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Reed Hastings, president and CEO of Netflix (Getty Images)

Netflix (NFLX) seemed to do everything right in releasing its second-quarter report on Tuesday night.
  • Revenue climbed nearly 13% to $889 million, exactly where Wall Street figured that Netflix would land.
  • The fallen dot-com darling's quarterly profit of $0.11 a share was more than double what analysts were targeting for the period.
  • Sure, it once again lost a ton of DVD-based subscribers, but it more than made up the difference in domestic and international streaming accounts.
However, the market didn't like what it was hearing. Shares of Netflix fell sharply after the financials were released.

Great Expectations

CEO Reed Hastings may have dug his own hole here. It was his status update on Facebook a few weeks ago -- proudly proclaiming that Netflix has served up more than a billion hours of streaming video for the month of June -- that got investors excited about the prospects for the second quarter.

The record premium video tally moved the stock higher, signaling strong retention rates, healthy engagement, and robust subscriber growth. Unfortunately, the run in Netflix's stock ahead of Tuesday night's report simply pumped up expectations. Simply meeting Wall Street's top-line target of $889 million wasn't enough.

When hype is building a merely satisfactory report will not do. Penetrating 10% of Canadian households or surpassing Amazon.com's (AMZN) LOVEFiLM in the UK became pleasant footnotes in a quarterly report that didn't do enough to justify the recent stock gains.

Back to the Future

Netflix's outlook also isn't particularly encouraging.

For starters, the company expects to remain profitable during the third quarter -- despite posting a sequentially larger loss overseas -- but it won't last. Netflix is targeting a return to a consolidated loss as it expands into a new European market during the final quarter of this year.

The third quarter itself also will be challenging. Netflix is eyeing domestic net additions between 1 million and 1.8 million, likely falling short of the 1.8 million net additions it achieved domestically two years ago.

Netflix fears that the Olympics will distract customers or, at the very least, slow the influx of new subscribers. The demand for old shows and movies will take a hit with practically round-the-clock live sports programming during the 2012 Olympic Games in London.

Little Miss Sunshine

There are a few positive developments.

The biggest highlight is that there are now a record 30 million Netflix subscribers between the 24 million domestic streaming customers, the 3.6 million international subscribers, and the 2.5 million DVD-based members that don't pay to stream.

The slate of original programming is also on track, and there are now more than a million subscribers in Latin America.

These items may provide little consolation to Netflix shareholders this week, but they will benefit the company in the long run.

Motley Fool contributor Rick Munarriz does own shares in Netflix. The Motley Fool owns shares of Netflix and Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com.

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kafienkarl

The market is over priced.

July 25 2012 at 9:50 PM Report abuse rate up rate down Reply