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Three months ago, Netflix (NASDAQ: NFLX) stock plunged after the company reported what it described as "a strong but not stellar Q2" performance. The streaming video leader missed its subscriber growth forecast by a wide margin, despite doubling its marketing spending year over year.
But Netflix got back into investors' good graces last week, as it posted third-quarter results that soared past its guidance on virtually all key metrics. That said, its fourth-quarter outlook wasn't particularly impressive. The recent earnings report represents an "all clear" signal for buying Netflix shares only if you don't put much stock in the company's Q4 forecast.
Results soar past expectations
In July, Netflix projected that it would add 5.15 million paid subscribers during the third quarter: 700,000 in the U.S. and 4.45 million in international markets. That would have been roughly in line with Q3 2017, when it added 4.99 million paid subscribers. But on a brighter note, the company expected to post earnings per share of $0.68 on $3.99 billion of revenue -- up substantially from $0.29 and $2.99 billion a year earlier.
Revenue came in at $4 billion, nearly hitting Netflix's estimate right on the nose. Otherwise, Netflix simply crushed its internal projections last quarter.
In the U.S., the company added 1 million net paid subscribers, surpassing its forecast by more than 40%. International paid subscriber growth came in at 5.07 million -- a record for the third quarter, and 14% ahead of Netflix's estimate.
Image source: Netflix.
Netflix achieved this acceleration in subscriber growth even as it reduced marketing spending by 17% sequentially. (Marketing costs still increased 39% year over year.) As a result, EPS more than tripled year over year, reaching $0.89 -- 31% ahead of the company's forecast.
Guidance isn't nearly as bullish
These numbers make it clear that Netflix is still a high-growth company. But given that Netflix trades for about 135 times analysts' 2018 EPS estimates, this level of growth still might not be enough to justify the stock price.
The streaming video pioneer's fourth-quarter forecast represents a potential caution flag in this regard. Subscriber growth is expected to be strong, with 7.6 million net paid additions, versus 6.62 million a year earlier. But Netflix estimates that revenue growth will slow to 28%, compared with 40% in the first half of 2018. Meanwhile, it expects content and marketing costs to surge, causing EPS to fall to $0.23 from $0.41 a year earlier. That would bring full-year EPS to approximately $2.61, or $0.10 below what analysts had been expecting.