Is Netflix A Buy After This Week's Big Decline?

Netflix, Inc.NFLX
has had a tough week after the company released its fiscal second-quarter earnings results on Tuesday prior to the opening bell. The shares fell around 14 percent after the company reported weaker-than-expected subscriber growth. On Friday, the stock remained at three-month low levels, holding just above $86.00.

Thus far, the shares have shed around 25 percent in 2016, and the stock is down better than 20 percent over the last 52 weeks, significantly underperforming the broader market. On a long-term basis, however, Netflix shareholders have been richly rewarded for holding the stock through periods of volatility. Consider for example, that as recently as 2012, NFLX traded under $9.00. Could the recent pullback in the stock be another opportunity?

First, it is important to gain an understanding of what went wrong in the most recent quarter. The company reported a significant slowdown in subscriber growth and the numbers for the United States were downright terrible. Netflix had previously said that it expected to add 2.5 million subscribers in the quarter, with 500,000 coming from the United States and the additional 2 million from overseas. The company, however, added only 1.68 million subscribers globally with just 160 thousand in the United States. Currently, Netflix has a total of 83.18 million subscribers.

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These figures compare to 6.74 million total subscriber additions, 2.23 million in the United States and 4.51 million overseas, in the previous quarter. Any long thesis on the shares must assume that the company will be able to change the momentum in its subscriber base. Netflix acknowledged this in a press release that accompanied its earnings release.

"We are growing, but not as fast as we would like or have been. Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business," the company said in a press release.

On the bright side, the company's financial results came in better than expected. Netflix reported a second-quarter profit of $40.8 million, or $0.09 per share, compared to $26.3 million, or $0.06 per share, in the year ago quarter. This easily beat Wall Street consensus EPS estimates of $0.02. Revenues of $2.11 billion were in line with expectations and showed strong growth from the $1.64 billion in sales the company reported last year. Looking ahead, Netflix expects that it will add 2.30 million subscribers globally and 500 thousand in the United States in the upcoming quarter.

The key for investors that want to own this stock is to focus on the big picture and understand that the massive returns that the company has produced have always come with significant volatility. Netflix is not a mature company, but it is in a perfect position for continued future growth, particularly when looking at international markets. The most recent results, however, suggest that it may be time for the company to begin focusing less on the bottom line and more on growth once again. If Netflix can do this, look for the long-term gains to continue in this stock.

Netflix closed Friday's trading session down 0.12 percent on the day at $85.89.

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