Why Netflix stock is going haywire after its latest earnings report - Yahoo Finance

Wall Street is right to disregard a rare earnings miss from streaming king Netflix.

Netflix (NFLX) shares exploded 13% in pre-market trading on Wednesday, indicating the stock will open at a record high despite the earnings shortfall on Tuesday evening. To be sure, the report had a lot of fodder for the Netflix bulls to take on the bears roaring about the earnings miss.

The company surpassed 200 million paid subscribers for the first time, powered by a world continuing to consume large amounts of content at home during the COVID-19 pandemic. Meanwhile, the raw numbers on the quarter suggest Netflix hasn’t seen subscribers balk at its latest price hike that hit in October.

“Importantly, while Netflix beat subscriber expectations in all major territories, Netflix’s most mature market U.S./Canada reported materially better than expected nearly +900K net new subscribers (vs. our +375K expectation) which highlights that the ultimate penetration for NFLX services globally could be higher than anticipated,” pointed out Pivotal Research Group analyst Jeff Wlodarczak.

Here’s how Netflix performed in the quarter.

• Net Sales: $6.64 billion versus $6.63 billion estimate

• Diluted EPS: $1.19 versus $1.36 estimate

• Global paid subscriber additions: 8.51 million versus 6.03 million expected

But dig deeper, and you understand why Wall Street is perhaps more excited about the Netflix story than it has been in some time. The company flat out hit the earnings day trifecta of bullish indicators.

First, Netflix guided to a first quarter operating margin of 25%. That would be a meaningful step up from the already impressive 14.4% rate in the fourth quarter. Netflix’s highest operating margin of 2020 came in the second quarter at 22.1%. The read for Wall Street: as expected, the combination of a materially higher base of subscribers paying more for a service is leading to stronger profits.

A photo of a person about to watch Netflix on a screen inside an apartment, during the coronavirus lockdown in Dublin. On Wednesday, January 13, 2021, in Dublin, Ireland. (Photo by Artur Widak/NurPhoto via Getty Images)

Netflix didn’t stop there though. It added this nugget in the earnings release “we believe we no longer have a need to raise external financing for our day-to-day operations.” The company also raised its cash flow guidance for 2021 by $1 billion to breakeven. Considering Netflix’s business model has long required debt to operate, this improved free cash flow outlook is being embraced by the bulls.

“Netflix has been working towards this moment for multiple years, and is now in the unique position to continue its aggressive content spend while still generating significant future cash flows,” said Jefferies analyst Alex Giaimo.

The last sweetener in the quarter: Netflix signaled it may resume stock buybacks soon, as it did from time to time from 2007 to 2011.

Continued Giaimo, “While the 4Q sub beat will garner most of the attention, we believe the improved free cash flow commentary and future capital independence is the more important positive takeaway.

And you thought “Cobra Kai” was the reason for the Netflix stock enthusiasm. Nope.

Yahoo Finance tech editor Dan Howley contributed to this story.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.

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