Thursday, July 22, 2010

Netflix and Amazon beat market expectations, stocks get crushed while market rallies

Not a good day if you own both NFLX and AMZN ...


CNN-Money: Amazon shares tumble despite 41% sales growth
Amazon shares plunged 13% in after-hours trading Thursday after the company's second-quarter earnings came up far short of analyst expectations.

Amazon's sales are still growing fast: The company had revenue of $6.6 billion in the quarter ended June 30, up 41% from a year ago. Amazon's profit also rose, increasing 45% to $207 million.

But analysts hoped for better, and are keeping a close eye on Amazon's bottom line to see if intensifying competitive pressures knock the e-commerce giant off its game.

Forced by Barnes & Noble (BN) into an e-reader price war, Amazon.com slashed the price of its flagship Kindle to $189 last month. It later cut its high-end Kindle DX price tag by more than $100, to $379. Meanwile, Apple's (AAPL, Fortune 500) popular iPad -- which can store thousands of e-books -- could obliterate the entire stand-alone e-reader market within the next year or two.

Amazon tried earlier this week to draw attention to its bright spots. The company announced that sales of e-books for its popular Kindle reader now outnumber Amazon's sales of hardcover books. The company also said Kindle sales have picked up since last month's price cut, though it once again refused to disclose how many Kindles it has actually sold.

Amazon (AMZN, Fortune 500) said it expects third-quarter revenue to come in between $6.9 billion and $7.63 billion in revenue this quarter, in line with analyst estimates

Seriously, Amazon is in more markets than just E-Readers... the analysts and funds are going wild these days.

Let's divert our attention back to Netflix:
Barron online:Netflix Customers Love Streaming; Investors, Not So Much
The catch phrase of the day for Netflix (NFLX) analysts today was “priced for perfection” - at least three of them today used those precise words in their research notes to explain that the sell-off in the stock that started after-hours yesterday was simply a reflection of the fact that the company’s ethereal market cap left little room for anything other than super-human Q2 results. And they note that the numbers, while impressive generally, had a few blemishes; ergo, the stock is sliding.

The initial takeaway was that revenues were a little light of expectations, but there was more going on here than that. Average revenue per subscriber was down 5% sequentially, and 8% from a year ago; subscriber acquisition costs were up 13% sequentially and 2% year over year; and churn was up 20 basis points sequentially. On the other hand gross margins jumped 530 basis points from a year ago.

What seems to be happening here is that customers simply love the company’s streaming service - you can see it in the numbers.

* The lower ARPU reflects more and more customers choosing the low-end one-DVD-at-a-time $8.99-a-month plan in order to access the streaming service…
* …driving strong subscriber growth from new customers who want to join the all-you-can-eat streaming fun…
* …while customers are requesting fewer DVDs per month, thus cutting postal costs and boosting gross margins…
* …and driving EPS above estimates…
* …But the company also is seeing increased churn and higher subscriber acquisition costs.

...
Bottom line, investors believe that while there's room for growth in number of subscriptions, the earnings growth (which is what really matters for investment purposes) shows worrisome signals. Still - despite rising costs, imagine Netflix doubles it's customer base and maintains subscribers within a year - would the market still punish Netflix for costs?

Cheers!

1 comment:

  1. Now what happened to Netflix and Amazon? How come this has happened?

    ReplyDelete