Netflix (NASDAQ:NFLX) can’t catch a break. The company has been lagging the market over the past year, and recent developments have put even more pressure on the stock. On Oct. 20, Netflix reported its third-quarter earnings. The market wasn’t impressed, sending shares down significantly post-earnings. Netflix’s stock price is now hovering around its 52-week low. Could the company bounce back? Or is it time to give up on the streaming giant?
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Why did Netflix’s stock dip?
Netflix’s third-quarter update didn’t look that bad at first glance. The company’s revenue of $12.9 billion increased 11.8% year over year. Netflix’s operating income of $4.5 billion jumped 37.3% compared to the year-ago period, while its earnings per share came in at $0.87, 47.5% higher than the prior-year quarter.
It’s usually a good sign for any company when profits are growing faster than revenue. Meanwhile, Netflix’s free cash flow climbed 8.4% year over year to $2.9 billion. So far so good. However, Netflix’s revenue and earnings guidance for the fourth quarter missed analysts’ projections.
That’s one of the reasons the company’s shares dropped post-earnings. It’s also worth noting that Netflix adjusted its advertising revenue guidance for the year. The company previously expected revenue of $3 billion for this unit, but it reduced that estimate by about $300 million, which Netflix blamed on a slower-than-expected rollout of some ad product capabilities.
For a company that was already in the proverbial doghouse, that’s terrible news. Even management highlighted that there is room for the company to improve.
There is hope for a rebound
Does Netflix need a complete shift in strategy? Management doesn’t think so and instead plans to lean on what has worked in the past, including the company’s original content strategy, especially in its most important market, the U.S. That makes sense.
Many of Netflix’s original shows and movies have been very successful and have helped boost the platform’s engagement by spreading through word of mouth. This has helped strengthen the company’s significant pricing power and supported sales growth through price increases.
Also, Netflix may be underperforming, but that doesn’t mean the business is in serious trouble. Right now, Netflix’s problem is execution, and it intends to fix it. To that end, Netflix recently appointed Peter Rice, who held major leadership positions at Fox (NASDAQ:FOX) and Disney (NYSE:DIS), as its chief content officer.
