This is why I avoid investing in individual stocks.
Each year, the incoming freshmen in our School of Business read a book as part of our Read to Lead program. The book then becomes the basis for discussion throughout the Intro to Business class they take during their first semester.
This year the book was No Rules Rule: Netflix and the Culture of Reinvention, co-written by Reed Hastings, co-founder of Netflix, and Erin Meyer, a professor at INSEAD, one of the world’s top business schools. I had written a post earlier this year about my first impressions of the book, which I thought was wonderful.
Well, in today’s Wall Street Journal there was a story that looked at Netflix’s performance for the third quarter, which was released yesterday after the close of business. Here are some of the highlights of its performance:
- Netflix added 4.4 million memberships in the third quarter, more than the 3.5 million the company had forecast. In last year’s third quarter, Netflix added 2.2 million subscribers.
- “Squid Game” has become its most popular show ever, with 142 million households sampling the title. It is the No. 1 program in 94 countries!
- Netflix is also projecting a strong fourth quarter in terms of content with the return of the dark drama “You” and “Cobra Kai,” the popular series that is a sequel of sorts to the “Karate Kid” movie franchise
- “We have so much content coming in Q4 like we’ve never had,” said Netflix Chairman and Co-CEO Reed Hastings, who was sporting a “Squid Game” warm-up jacket during the company’s video call to discuss its results.
- Netflix has expanded its exclusive content with the purchase of the Road Dahl catalog, adding popular titles such as “Charlie and the Chocolate Factory” and “Matilda” to its stable.
- Netflix said revenue rose 16% to $7.48 billion, in line with Wall Street’s expectations.
- The company’s profit increased to $1.45 billion, or $3.19 a share, compared to $790 million, or $1.74 a share, in the same period a year ago. The $3.19 per share earnings also topped analysts’ earnings estimates of $2.57 a share
As I shared this data with my students this morning, I noted that all these numbers looked good for Netflix. I also noted that typically when key metrics like subscriber growth, revenue, and earnings exceed expectations, like it did for membership and earnings, that usually bodes well for the company’s stock price.
So I then went out to good old Yahoo Finance, and we discovered that the stock price dropped today, and by the end of the day it was down over 2%, a fairly big drop in one day.
So much for impressing my students with my insights into how the stock market works!
And I’m glad that I didn’t put any of my hard-earned dollars into Netflix the first thing this morning.
So what happened?
I’ll leave it to people far smarter than me when it comes to the stock market to explain what they believe caused such a result. This video is about seven minutes long, so if you want to skip it, I offer some key takeaways after the video.
- while the number of subscribers was above published estimates, it was below what is known as the whisper number, which had estimated subscribers to be between 4.6 and 4.7 million subscribers. Whisper numbers are the unofficial consensus of what results will be for a company at the next announcement.
- Netflix projected that subscriber growth for the fourth quarter will be about 8.5 million new subscribers, below what analysts had estimated of between 9.3 and 9.5 million.
- one of the analysts suggests that the reason for the drop in the stock price is because the growth in subscribers for the first six months of this year was well below what they were compared to the first six months of last year. While that is certainly true, that should have little to do with the current stock price. That information became known shortly after the end of the second quarter of this year and thus would have been embedded in the stock price at that time.
- one analyst suggests that investors are so used to Netflix releasing eye-popping numbers and while the numbers this quarter are good, they may not be considered eye-popping. As a result, in some sense, it may be that Netflix didn’t live up to such lofty expectations, and as a result, the stock price drops.
- there is some controversy with comments made by David Chapelle, who is currently starring in a new Netflix series, The Closer. There has been some backlash against the company as a result.
- there may be some concern that the cost of acquiring content will increase significantly, hurting the company’s bottom line
So bottom line, trying to pick what will happen to an individual stock price on a given day is a guessing game. That’s why the concept of diversification is so critical.
Hopefully, next week, when I plan to offer my analysis of Apple’s quarterly earnings, the stock will behave like it’s supposed to. And students won’t start asking me, given my love for Apple, why I didn’t invest in it 30 years ago. As usual, I have no good answer to that question…
And perhaps most importantly, it looks like I need to start watching Squid Game.
*image from Forbes