Netflix is a very vulnerable stock right now, this investor says

Netflix shares have plummeted since the streaming company reported its second quarter financials on Monday, which featured an earnings per share beat of $0.85 versus the consensus $0.79 and total revenue which increased 40 per cent to $3.91 billion versus the consensus $3.94 billion. (All figures in US dollars.)

But it was the subscriber additions that are causing all the fuss.

In the United States, Netflix added 670,000 new subscribers, which was below analysts expectations of 1.19 million, while internationally, the company signed up 4.47 million versus the consensus expectation of 4.97 million. Overall, Netflix had forecasted 6.2 million new subscribers for the quarter but came up more than one million short.

Of the miscalculation, Netflix said in its quarterly letter that it had “over-forecasted” fluctuations in the pace of new subscribers and that it is “difficult to forecast for a global service.”

So far, investors have greeted the news with a major selloff, dropping NFLX shares by 14 per cent.

Morgan says the subscriber numbers come as a shock, considering the optimism surrounding the company through the first half of 2018.

“Evidently, it’s a huge miss, which is really surprising to me because you go back and look at the first quarter. They did 7.41 million subscribers and beat all the estimates and they gave us a very rosy forecast for the second quarter and they’ve actually come out with numbers that are below their forecast,” said Morgan, VP and senior portfolio manager at Synovus Trust Company, to BNN Bloomberg. “This stock is trading at 140x next year’s earnings and is obviously very vulnerable to a setback like this.”

Following the Q2 results, Deutsche Bank has reportedly downgraded Netflix from “Buy” to “Hold,” saying that the slowdown in growth merits “a revaluation of value and consideration of the stocks year to date appreciation from $200 per share.”

Morgan says that not only is competition heating up in the streaming content sector, Netflix’s domestic market is now more or less saturated, meaning that growth will have to come from international markets.

“You look at the other subscriber companies, you’ve got Hulu, you’ve got Amazon, you have Disney and all these other players that are out there” says Morgan. “Netflix still has the most subscribers — they’re substantially over 100 million compared to the other ones who are 15-20 million, so they’re still the big giant in that space.”

“The big issue going forward is just maintaining that content with those different studios,” he says. “I think Disney pulled from under them at one point and was not providing content, so that’s always a risk for them that they’ll lose more movie studios’ ability to bring that content in and that will hurt the number of subscribers and people signing up.”