Key Points
Netflix edged out revenue targets and crushed earnings expectations in the first quarter.
Investors still held their nose when management set modest next-quarter targets.
Perhaps most significantly, co-founder Reed Hastings is leaving the Board after shaking up Hollywood for nearly three decades.
Shares of Netflix(NASDAQ: NFLX) fell as much as 11.8% shortly after Friday's opening bell, following a fantastic earnings report with modest guidance for the next quarter. As of 11:25 a.m. ET, the entertainment pioneer's stock had recovered slightly to a 9.7% drop.
Image source: Netflix.
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A beat, a breakup fee, and the end of an era
Netflix's first-quarter sales rose 16.2% year-over-year to $12.25 billion. That's just ahead of management's guidance, and the consensus Street view, calling for $12.18 billion.
On the bottom line, earnings per diluted share jumped 86% to $1.23. Here, the average analyst projected $0.79 per share.
The large earnings surprise sprung from the $2.8 billion merger termination fee Netflix collected from Paramount Skydance(NASDAQ: PSKY) in the first quarter. Management and analysts didn't update their profit target to reflect this one-time upside of leaving Warner Bros. Discovery(NASDAQ: WBD) up for grabs.
But Netflix investors still found reasons to drop the share price after a pretty stellar report. First, the Warner Bros. breakup fee was a unique item that isn't coming back in future reports. Second, management held on to existing full-year guidance targets, while some investors were hoping for higher revenue and profit targets. In other words, the next quarter's results might be weaker than expected.
Moreover, Netflix co-founder and longtime former CEO Reed Hastings announced the last step of his retirement. Hastings won't run for this year's Board of Directors election, so the company will have to find a new Chairman.
Putting the price drop in perspective
If you only look at the financial results and guidance targets, today's price drop seems harsh. Netflix crushed expectations, albeit partly because of the failed Warner Bros. deal. Second-quarter softness should carry less weight than the firm full-year targets. After all, investing is more of a full-day nature hike than a 100-meter dash.
The real game changer in this report, then, is Reed Hastings waving goodbye. As co-CEOs Greg Peters and Ted Sarandos underscored on the earnings call, Hastings was instrumental to the company's structure, culture, and long-term success. Next, investors will see how well he has groomed the next generation of Netflix leaders.
All that said, Netflix is back to prices not seen since two weeks ago. The stock is still up a market-beating 28% since canceling the Warner Bros. buyout process in February. Netflix remains a great long-term buy.
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Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
