It’s been a busy earnings week for Wall Street. It also marks the start of earnings for the FAANG group — Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL) — as NFLX reported its third-quarter earnings results on Tuesday. Tesla (NASDAQ:TSLA) also stepped up to bat Wednesday.
While plenty of other companies released their quarterly results this week, all eyes were on NFLX and TSLA. So, let’s use today’s Market360 to dive into the numbers.
Netflix had a tough third quarter. Earnings per share of $1.74 missed analysts’ expectations for $2.14. Revenue of $6.44 billion came in slightly above estimates calling for $6.38 billion. However, the streaming giant only added 2.2 million global paid net subscribers, well below the expected 3.57 million. This represents a 67.6% year-over-year drop from the 6.8 million Netflix added in the second quarter of 2019. The 2.2 million total was also below the company’s own estimates for 2.5 million.
To make it even worse, guidance for Netflix’s fourth quarter was weak. Company management is now forecasting 6.0 million global paid net subscribers, below the analyst community’s estimates for 6.5 million. This is also a 31.8% year-over-year decrease from the 8.8 million added from the same quarter a year ago.
Company management blamed the disappointing numbers on its record-breaking results from the first six months of 2020. In the second quarter alone, Netflix added 15.7 million new global net paid subscribers.
Regardless, Wall Street was not pleased with the results, knocking the stock more than 4% lower following the report.
Tesla Reports a Blowout Quarter
Tesla, on the other hand, reported another blowout quarter. Or, as CEO Elon Musk put it, the “best quarter in history.”
Adjusted earnings of $874 million, or adjusted earnings per share of $0.76, came in well above the expected adjusted earnings for $0.57. So, the company posted a 33.3% earnings surprise. This also marks the company’s fifth-consecutive profitable quarter.
Revenue of $8.77 billion bested expectations for $8.36 billion by 5%. The company delivered a record-breaking 139,593 vehicles in the third quarter, versus the 112,000 delivered vehicles from the same quarter a year ago.
Despite the big earnings beat and record deliveries, Wall Street wasn’t very impressed. The stock popped 4.6% at the open but was unable to maintain its momentum, and its rally faded later in the day.
The reality is that the company’s profitability was given a big boost by the $397 million worth of regulatory credits it sold in the third quarter. Without the regulatory credits, Tesla would not have made money. For the past nine months alone, Tesla has made a whopping $1.18 billion in regulatory credit sales.
It is also extremely overvalued. Currently, Tesla’s market cap is around $400 billion, which is five times more than Ford’s (NYSE:F) and General Motors’ (NYSE:GM) market caps combined. And its P/E (price-to-earnings ratio) is more than 1,124.
Plus, there is competition coming from the likes of Volkswagen (OTCMKTS:VWAGY) with its new ID.4, which is available to purchase now at $41,190, and Ford’s Mustang Mach-E, which Ford looks to begin selling by year-end. In addition, Volkswagen is working on a significantly cheaper elective vehicle, which it expects to unveiled in 2022. Volkswagen and Ford also one-up Tesla on federal tax credits. They can offer up to $7,500 in credits. Due to congressional regulations, Tesla can’t offer any tax incentives after selling 200,000 of its electric vehicles earlier this year.
Overall, I’m not too impressed by either companies’ earnings results. Clearly, Netflix’s growth is slowing (at least in the near term), and Tesla’s profitability is largely due to regulatory credits. And down the road it might find itself in hot water as electric vehicle competition increases.
As an investor, I only want the fundamentally superior growth stocks, and neither Netflix nor Tesla fit the bill right now.
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Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Amazon (AMZN), Google (GOOGL), Logitech International SA (LOGI)
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.