Why the Netflix share price is falling

The share price of streaming giant Netflix fell 4% to US$339 at the close of Friday trade following the release of its fourth quarter earnings report after the close of trade on Thursday.

Mixed report

Netflix’s Q4 2018 earnings report was a mixed bag. The company reported revenue of US$4,187 million for the quarter, a 27% increase over the prior corresponding period. This was around US$20 million short of the consensus revenue forecast with Netflix noting that adverse foreign exchange movements had impacted its top line.

On the bottom line, Netflix reported diluted earnings per share (EPS) of 30 cents for the quarter, beating the consensus estimate of 24 cents. However, the company continues to lose money from a cash flow perspective with negative free cash flow of US$1,315 million reported in Q4 and US$3,020 million for the 2018 calendar year.

Netflix’s subscriber base continues to grow with the company adding 8.8 million paid memberships for the quarter (1.5 million in the U.S. and 7.3 million internationally), surpassing expectations of 7.6 million net additions.

Foolish takeaway

2018 was a strong year for Netflix with the company growing annual revenue by 35% to US$16 billion and almost doubling operating profit to US$1.6 billion. The impressive growth was a result of significant subscriber growth with 29 million additions in 2018 bringing the total amount of paying members to 139 million at the end of 2018.

Friday’s share price fall could by explained by the softer-than-expected guidance for Q1 2019. Netflix has forecast for Q1 revenue to rise by 21% over the prior corresponding period to US$4,494 million and diluted EPS to increase by 37% to 56 cents. Furthermore, it expects to add 8.9 million subscribers in Q1 bringing the total amount of subscribers to 148 million.

Investors should not be overly concerned by Friday’s reaction as the share price has still risen by 35% over the last 12 months and is up around 47% since late December.

Netflix is the first of the FANG stocks (Facebook, Amazon, Netflix, Google (Alphabet)) to report its quarterly earnings with the rest of the big tech names scheduled to announce their numbers over the next couple of weeks.

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Motley Fool contributor Tim Katavic owns shares of Alphabet (A shares). John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Netflix. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Facebook, and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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