With Netflix's (NFLX -9.09%) back to the wall -- facing stiff headwinds in the form of incoming competition with cutthroat pricing and weak momentum after a rare second-quarter subscriber miss -- the leading premium service held up surprisingly well after posting its third-quarter results shortly after Wednesday's market close. Netflix stock even initially jumped higher on the financial update, trading north of $300 for the first time in more than a month in Wednesday's after-hours trading.
The shocker here is that Netflix did fall short of its earlier subscriber forecast for the three months ending in September. It closed out the third quarter with 6.77 million more premium streaming accounts worldwide than it had when the period began. Netflix guidance was calling for 7 million net adds. This is the first time in years -- if ever -- that Netflix missed its own subscriber guidance in back-to-back quarters. Investors are apparently fine with that unfortunate milestone, but let's take a closer look to see why Wall Street is cool with Netflix's cracked crystal ball.
The Netflix original show "Elite." Image source: Netflix.
1. This wasn't Q2 all over again
The previous quarter's miss was one for the ages. Netflix was targeting 5 million net additions for the second quarter, and it wound up growing its membership rolls only by 2.7 million.
A miss is a miss, of course. However, missing your goal by 46% the way Netflix did in the second quarter and just 3% this time around is a pretty big difference. The nearly 6.8 million global net additions to its streaming platform is comfortably ahead of the 6.1 million net adds it posted a year earlier for the same quarter.
2. The quality of the subscriber matters
The $5.245 billion in revenue that Netflix delivered in the third quarter is a rounding decision away from nailing the $5.25 billion that the online service operator was forecasting for the quarter in mid-July. The same price hike earlier this year that cooled down subscriber growth is also boosting how much money Netflix is collecting from its members.
Membership growth has slowed to a still-respectable 22% year-over-year uptick in streaming subscribers, but that's stacked on top of a 9% increase in average revenue per user to arrive at the 31% increase on the top line. Adjust for the foreign currency swings and the gains are even higher.
Customers paying more can work wonders for the bottom line with this scalable model, and we are seeing that this week with Netflix's operating profit more than doubling for the quarter. The $665 million in net income for the period blew away the $470 million that Netflix was modeling three months ago.
3. International growth lived up to its end of the bargain
The entirety of the subscriber shortfall came from its domestic operations, a segment that clearly felt the pinch earlier this year after seeing Netflix's most popular plan increase in price by $2 a month. Its international performance actually slightly exceeded its subscriber guidance.
This is good news because it shows that Netflix isn't losing steam internationally, where it's been generating more revenue than in the U.S. since the summer of last year. Even on the stateside front, the news isn't terrible. Netflix is growing its membership sequentially again after slipping on that front in the second quarter.
4. Starting lines matter
Netflix stock isn't the market darling it was when it peaked in June of last year. The shares are a third off of its all-time highs, and down 21% since announcing its poorly received second-quarter results just three months ago. A key to successful investing is identifying not only what stocks to buy but when to buy them.
Wall Street expectations were getting hosed down in recent weeks. Several analysts were lowering their price targets heading into Wednesday afternoon's earnings release. Even a ho-hum report would have been satisfying, and there was still plenty to like in Netflix's report once you got past the subscriber-miss headlines.
