Credit: Shutterstock photoNetflix ( NFLX ), the world's largest video streaming company, disappointed investors with its third-quarter results before the closing bell on Wednesday. It broke its longest streak of 19 consecutive quarters of earnings beat while missed on revenues for yet another quarter.
Further, the company added fewer-than-expected subscribers in the U.S., raising apprehensions that it might have started facing trouble in attracting customers amid stiff competition from Amazon ( AMZN ), Hulu and a pay TV provider HBO. As a result, shares of NFLX tumbled as much as 15% in after-market trade but clawed back to close at down 3% (see: all the Technology ETFs here ).
Netflix Q3 Earnings in Detail
The company reported earnings per share of 7 cents, on par with the Zacks Consensus Estimate and down from the year-ago earnings of 14 cents. Revenues climbed 29.2% year over year to $1.58 billion but were below our estimate of $1.743 billion.
Netflix added 3.62 million total subscribers in the third quarter, well above its own projections of 3.55 million additions. Though the majority of 2.74 million came from international markets, U.S. additions of 0.88 million fell short of the company's projection of 1.15 million. This miss was partly attributable to the ongoing transition to chip-based credit and debit cards that led to a higher-than-expected involuntary churn (inability to collect payment from subscribers).
Outlook Still Encouraging
Despite slower domestic growth, Netflix is running ahead of last year in terms of U.S. additions and remains on track to add about 6 million subscribers this year. If comes true, 2015 would represent the fourth consecutive year of at least 6 million additions. For the final quarter of 2015, the company expects to add a total of 5.15 million subscribers, including 1.65 million in the U.S. and 3.50 million internationally. Overall, Netflix has 69.17 million subscribers at the end of the third quarter and expects to surpass over 74 million by the end of the fourth quarter.
The online video streaming giant is aggressively expanding in the international markets and expects to go fully global in 200 countries by the end of next year. Currently, its service is available in 80 countries and is expected to be launched in Spain, Italy and Portugal by the end of this year. Additionally, the expansion to South Korea, Hong Kong, Taiwan and Singapore is slated for early next year (read: Watch These Country ETFs Rebounding to Start Q4 ).
As Netflix expands into new markets, it continues to enlarge its original content offerings and launch new television shows and movies. The company, known for its original shows such as House of Cards and Orange is the New Black , unveiled the Club de Cuervous and Nacros in the last quarter. It is in the process of releasing its first original feature film - Beasts of No Nation - on October 16 and then the second film - Adam Sandler's The Ridiculous Six - in December. Further, Netflix started the production of the second Mexican original series - Ingobernable .
Moreover, the company expects earnings per share of 2 cents in the fourth quarter, in line with the Zacks Consensus Estimate.
ETFs to Watch
Despite sluggish results and terrible after-market trading, the outlook for Netflix seems bright given its expansion and development plans. Notably, Netflix surged nearly 126% over the year through Wednesday's close. The stock currently has a Zacks Rank of #2 (Buy) and a solid Zacks Industry Rank in the top 22%.
Given the solid long-term outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk-tolerant, long-term investors may want to consider the recent slump a buying opportunity, should they have the patience for extreme volatility. For those, we have highlighted four technology ETFs with a higher allocation to Netflix that should be on their radar (read: 4 Sector ETFs for Q4 ).
All these funds have a Zacks ETF Rank of 2 or 'Buy' rating, suggesting that these will likely outperform the broad market index in the coming months.
PowerShares Nasdaq Internet Portfolio ( PNQI )
This fund offers exposure to the largest and most liquid companies that are engaged in Internet-related businesses by tracking the Nasdaq Internet Index. It holds about 97 stocks with Netflix taking the fifth spot in its basket with 7.46% allocation. Internet software & services dominates the portfolio with 56.7% share in the basket, closely followed by Internet & catalog retail at 38.2%. The product has AUM of $223.2 million and trades in a light volume of about 19,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank of 2 or 'Buy' rating with a High risk outlook.
SPDR Morgan Stanley Technology ETF ( MTK )
This ETF tracks the Morgan Stanley Technology Index, giving investors exposure to the broad technology space. The fund holds a small basket of 37 stocks with AUM of $440.4 million and expense ratio of 0.35%. Volume is light as it exchanges nearly 22,000 shares in hand a day. Netflix occupies the top position in the basket with 6.1% of assets. From an industrial look, the fund is well spread out across IT services, software, Internet software & services, Internet & catalog retail, communications equipment, and technology hardware storage & peripherals with double-digit exposure each. The fund has a Zacks ETF Rank of 2 with a Medium risk outlook (read: 3 Promising Tech ETFs Jumping to Rank #2 from 4 ).
First Trust Dow Jones Internet Index ( FDN )
This is one of the most popular and liquid ETFs in the broad tech space with AUM of $3.6 billion and average daily volume of more than 405,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 54 bps in fees per year. In total, the fund holds 41 stocks with Netflix taking the fourth position at 5.4%. Internet mobile applications account for 42% of the portfolio while Internet & catalog retail makes up for 22%. The product has a Zacks ETF Rank of 2 with a High risk outlook.
First Trust ISE Cloud Computing Index Fund ( SKYY )
This fund provides exposure to the cloud computing securities by tracking the ISE Cloud Computing Index. Holding about 36 stocks, Netflix takes the third spot at 4.4% of assets. Software firms dominate this ETF, accounting for 35.9% share while Internet software services (19.1%) and communication equipment (14.4%) round off to the next two sectors. The product has been able to manage $500.8 million in its asset base while sees moderate volume of about 74,000 shares a day. It has 0.60% in expense ratio and has a Zacks ETF Rank of 2 with a High risk outlook.
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NETFLIX INC (NFLX): Free Stock Analysis Report
PWRSH-ND INTRNT (PNQI): ETF Research Reports
SPDR-MS TECH (MTK): ETF Research Reports
FT-DJ INTRNT IX (FDN): ETF Research Reports
FT-CLOUD COMPUT (SKYY): ETF Research Reports
AMAZON.COM INC (AMZN): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
