Netflix pares losses after worst two-year drop

Netflix shares pared their worst drop in two years, regaining a key support level for the stock.

Shares of the streaming video provider pared their losses, after earlier declining as much as 14% after a disappointing second-quarter earnings report.

The 50-day moving average for the shares is about $370.74, and the stock hasn’t closed below that threshold since early April.

The stock price doubled in the last year, raising its value to within sight of $200bn (€170.9bn) before its earnings statement.

“For those who wanted an entry point, here it is,” said Bernstein analyst Todd Juenger in a note to clients.

Netflix is still the second-best performer in the S&P 500 Index this year with a 98% gain.

The Netflix rebound came amid a broader rally in tech stocks in the US.

Netflix’s disappointing second-quarter report which was released late on Monday has raised surprisingly few alarms on Wall Street even as the shares tumbled.

Analysts at Bernstein say it was inevitable that the streaming company would eventually fall short of subscriber expectations, and Wells Fargo said “subscriber and pricing trends remain healthy” despite quarterly volatility.

Imperial Capital, the stock’s biggest bull, maintained its price target although Deutsche Bank took a more cautious tone, cutting its rating to hold and saying upside for Netflix shares is limited for the next year as subscriber growth slows.

Wells Fargo saw “no change in course” for Netflix even with the weaker-than-expected subscriber growth in the second-quarter results and third-quarter forecast.

“Although this quarter’s results were less positive, we nevertheless believe in Netflix’s ability to generate meaningful synergies from its global/originals strategies and in the significant long-term pricing power that its model holds,” said Wells Fargo.

While Wall Street remains overwhelmingly positive on Netflix and its role in video streaming globally, the second-quarter figures did raise question marks over future growth and six brokerages cut their price targets on the company’s shares.

“The quarter is a reminder that Netflix’s cadence of net adds is not linear, but lumpy in nature,” said Justin Patterson, an analyst with Raymond James and Associates in San Francisco, while pointing to the absence of a new hit series as a driver.

“The company had lots of new content during the quarter; what it did not have was a major new breakout series,” he said.

Riding on the success of its original shows such as 13 Reasons Why, House of Cards, and Orange is the New Black, Netflix had beaten subscriber growth expectations in seven out of the last 10 quarters.

What is not clear is where the hurdles to that unbroken run of growth will come from, be it stronger competition from Amazon Prime or the changes in control of major film and TV franchises heralded by Walt Disney and Comcast’s bid for Twenty-First Century Fox.

Analysts at MoffettNathanson said that Netflix’s domination of its sector looked less durable than the other high-flying group of new media and internet companies.

“The moat around Netflix’s business model does not appear as deep as other models,” they said.

“We doubt that they can create and enjoy monopoly economics in content creation and internet distribution.”

Netflix added 5.15 million customers from April through June, 1 million fewer than forecasts by analysts and down from 7.41 million in the first quarter.

“While subscriber weakness is obviously an issue, the company’s inability to explain it satisfactorily could weigh on the stock over the coming quarter,” said Barclays analysts.

Bloomberg and Reuters

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