Financial Advisors Eye Netflix Amid Disappointing Subscription Growth and Potential New Competitor

The US stock market had a strong July, with all three main indexes gaining ground mainly on the back of the second-quarter earnings season. The top gainer of the month was the Dow Jones Industrial Average, which advanced by more than 4.30% last month, followed by S&P 500 with gains of 3.43%. The Nasdaq Composite inched up by just 2.41%, which is still positive, considering the disappointing results reported by Facebook, Inc. (NASDAQ:FB), which dragged other tech giants lower. In addition, the NASDAQ remains the leader in terms of year-to-date performance, with gains of 11.41%, while the S&P 500 and Dow Jones are up by just 5.15% and 2.48%, respectively.

In addition to earnings reported by many prominent firms, the US stock market also received some tailwind from a strong second-quarter GDP growth figure. According to the Commerce Department, the US economy grew by 4.1% in the second quarter, which was in line with expectations. There also has been some positive news on the international trade front, which has been in the spotlight for the last several months. According to a Bloomberg News report on the last day of the month, which cites two people familiar with the matter, the US and China are trying to restart talks to avoid a trade war. The report precedes the July 25 talks between President Trump and European Commission president, Jean-Claude Juncker, which ended with the US President securing some trade concessions from the EU.

The second-quarter earnings season is in full swing, with over 50% of the S&P 500 companies having reported their results. Even though Facebook posted disappointing results, which caused the biggest one-day loss in value of any stock in history ($120 billion), the markets were still pleased to see Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) report better-than-expected results. Big banks, which were among the first to report their earnings, posted mixed results, with JPMorgan Chase & Co. (NYSE:JPM) topping both EPS and revenue estimates, but Wells Fargo & Co. (NYSE:WFC) disappointed on both top and bottom line.

Overall, FactSet has said that over 80% of the S&P 500 companies delivered better-than-expected earnings for the second quarter and more than 75% posted revenue above estimates.

Even though headlines have been mostly focused on the earnings season, Financial Advisors had their attention on developments aside from the companies’ financial performance. According to TrackStar, InvestingChannel’s official newsletter capturing and analyzing the trends of Financial Advisors, which has compiled a list of the 20 most-searched tickers among Financial Advisors in July, the top three most-searched companies were Netflix, Inc. (NASDAQ:NFLX), Starbucks Corporation (NASDAQ:SBUX), and Barrick Gold Corp (USA) (NYSE:ABX), for all three of which the main news of July was their earnings reports.

The fourth most searched ticker was  United Therapeutics Corporation (NASDAQ:UTHR), which at the end of July received big news for its flagship drug Remodulin. On July 31, the US FDA approved Medtronic (NYSE:MDT)’s Implantable System for Remodulin, and United Therapeutics will be able to sell it in the US as a way to deliver its drug intravenously as soon as early next year. The fifth most-searched ticker in July was Walt Disney Co (NYSE:DIS), which last month received shareholders’ approval for the $71 billion deal to buy Twenty-First Century Fox Inc (NASDAQ:FOX)’s entertainment assets.

Netflix, Inc. (NASDAQ:NFLX) was the stock that received most attention from Financial Advisors last month. Netflix was also among the first big companies to post its results (on July 16), which disappointed investors, judging by the nosedive that the stock took after the report. Netflix, Inc. (NASDAQ:NFLX)’s second-quarter EPS of $0.85 managed to beat the consensus estimate of $0.79 and the revenue of $3.91 billion was slightly lower than expected, but still it grew by over 40% on the year.

Even though the top and bottom line should’ve been good enough for investors, in Netflix’s case, there is one other metric that matters when it comes to performance, subscribers. In the second quarter, Netflix, Inc. (NASDAQ:NFLX) added just 670,000 subscribers in the US, significantly lower than its own guidance of 1.20 million, while analysts had been expecting on average 1.21 million. International additions also amounted to 4.47 million, versus guidance of 5.0 million and a consensus estimate of 5.06 million. In this way, Netflix ended the second quarter with 130.14 million subscribers. For the third quarter, Netflix expects to add 650,000 subscribers in the US and 4.35 million internationally, amounting to a total of 5.0 million subscribers, which is lower than expectations of 5.93 million additions. 

Following the results, analysts jumped in to revise their ratings and targets on Netflix’s stock. Some analysts, like B. Riley FBR said that the second-quarter report indicates the end of Netflix, Inc. (NASDAQ:NFLX)’s stellar growth, but BMO Capital suggests that the slow down in subscribers is temporary and a lot of successful tech giants have hit snags in the past and have managed to recover.

Netflix, Inc. (NASDAQ:NFLX)’s shares might’ve had a quiet second half of July as the market dealt with other earnings, but it took another hit at the end of the month. On July 19, Variety confirmed that Walmart Inc (NYSE:WMT) was looking into launching its own streaming service to rival Netflix, Amazon.com, Inc. (NASDAQ:AMZN)’s Prime Video and Hulu. Nine days later, The Wall Street Journal provided more details about Walmart’s new platform, saying that it might be approved by the first half of September and it would focus on Wal-Mart’s core shoppers in the Middle America (away from the coasts and outside large cities). Following the WSJ’s report, Netflix’s stock lost 5% and ended July 15% in the red.  

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