Why Netflix stock fell nearly 5% on Wednesday

Market makers didn’t love the streaming video veteran’s second-quarter report.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Netflix (NASDAQ: NFLX) fell by as much as 4.8% on Wednesday morning following the media-streaming specialist's second-quarter earnings report. Netflix beat some financial targets while falling short on others, and the market focused on the unsatisfactory pieces of the puzzle. The stock was down by 4.1% as of 1:25 p.m. EDT.

So what

Second-quarter revenues rose 19% year over year to $7.34 billion, slightly above management's guidance of $7.30 billion and Wall Street's consensus estimate of $7.32 billion. Earnings jumped 90%, landing at $2.97 per diluted share. Here, the guidance target pointed to $3.16 per share and the average analyst wanted to see roughly $3.15 per share. Netflix's operating profits also came in just below management's official target, while its 1.54 million net new paying subscribers exceeded the official goal of 1 million. Looking ahead to the third quarter, Netflix forecast that it would add 3.5 million net new subscribers, below the Street's consensus estimate of at least 5 million new accounts. Management also said that it will roll out a range of games as a free add-on to its video-streaming plans, turning every Netflix-capable device into a potential gaming platform.

Now what

It's no surprise to see the Netflix bears focusing on a soft bottom-line reading and a modest forecast for next quarter's subscriber growth. At the same time, the company's second-quarter profits were low for all the right reasons, reflecting a 10% increase in content costs and 39% higher marketing expenses. The company is putting its back into building and promoting a better video service. That's exactly what I was hoping to see in this report. Wednesday's share price haircut makes sense from a certain point of view -- one in which solid short-term profits matter more than fantastic long-term returns. Netflix is doing everything right at the moment. Opportunistic investors should see this price drop as a wide-open buying window.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Anders Bylund owns shares of Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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