Netflix has just come out with another quarter of great earnings. They made just over 60 million dollars compared to earnings during the same period last year of 32 million dollars. That's great right?
Then why is the stock down more than $12 or almost 5% in after hours trading on 4/25/2011? Tomorrow investors will probably follow through and bid the stock down when the market opens. So, what gives?
This is a great example of a stock that goes down after great or good earnings. Something like this often doesn't make sense to beginners and to people that are just starting out. It is confusing unless you have a deeper understanding of what makes stocks go up and down.
Netflix's earnings were stellar and no one is denying that. Most companies would love to be making money and doing that much better in 2011 than in 2010. But for Netflix's stock price it wasn't good enough because more important than today's earnings, their management cautioned about the FUTURE. Management said that things might start to slow down a bit. That's what did it.
You see, Netflix is a very hot company right now that has had it's stock price come close to tripling in just a year. In order for that to continue, absolutely everything has to go perfectly. When a stock is that hot, you have to have earnings AND a future outlook that blows everyone away.
Actually, management's outlook is almost always more important to investors than the current quarter's earnings no matter what stock you are talking about. That is why it is also possible to have bad earnings along with a good outlook from management and have a stock go up. You see, the future is more important than the past in the eyes of investors.
Everyone knows that Netflix has been tremendously successful in their business model and they continue to sign up people at an impressive rate. They have put competitors out of business and now they are aggressively moving into streaming video which is the delivery system of the future.
But investors want to know if their phenomenal success is going to continue and any hiccup or warning about anything slowing down will make the stock stall or go backwards as we have just seen today. That will happen regardless of current earnings as people who invest in stocks are always more concerned about what the future holds.