Key Points
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Netflix reported higher-than-expected earnings due to the breakup fee it received from Warner Bros. Discovery after a deal to acquire certain assets fell apart.
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Netflix Co-Founder and board chair Reed Hastings also announced he is leaving the company.
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But the sell-off was driven by something else.
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Despite solid first-quarter earnings results, Netflix (NASDAQ: NFLX) stock crashed nearly 9% in after-hours trading, as of 5:26 p.m. ET on Thursday, April 16.
Netflix reported $1.23 earnings per share, well above its usual level, largely due to the $2.8 billion breakup fee it received after deciding to withdraw from a bidding war over certain Warner Bros. Discovery assets.
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Warner Bros. had to pay Netflix the fee because, after it had formally agreed to a deal with the company, Paramount Skydance launched a hostile bid, forcing Warner Bros. to resume negotiations with Paramount and, in turn, opening a bidding war.
Image source: Netflix.
Revenue of $12.25 billion in the quarter also beat the Wall Street consensus of $12.18 billion.
Additionally, Netflix Co-Founder Reed Hastings, who has served as chair of the company’s board of directors, announced he would be stepping down from the board to pursue philanthropy and other endeavors. Hastings first helped launch Netflix in 1997, and there is arguably no one more instrumental in making the company what it is today.
“Netflix changed my life in so many ways, and my all‑time favorite memory was January 2016, when we enabled nearly the entire planet to enjoy our
service,” Hastings said in a statement. “My real contribution at Netflix wasn’t a single decision; it was a focus on member joy, building a culture that others could inherit and improve, and building a company that could be both beloved by members and wildly successful for generations to come.”
While Hastings’ departure is a big deal, here’s the real reason I believe the stock is getting crushed in after-hours trading.
Weak forward guidance
While Hastings’ role at the company will be sorely missed, I suspect investors are more disappointed at the company’s weak guidance.
Netflix guided for 13% revenue growth, or slightly more than $12.5 billion, in the second quarter of 2026. However, the consensus estimate, according to data from Visible Alpha, had projected nearly $12.65 billion.
For the full year, Netflix left its prior guidance unchanged, which called for $51.2 billion of revenue at the midpoint. Once again, consensus estimates came in at roughly $51.4 billion. Operating margin guidance for the second quarter and the full year also came up short of consensus estimates provided by Visible Alpha.
In its letter to shareholders, Netflix management reiterated that it expects content amortization growth to be the highest in the second quarter on a year-over-year basis, before slowing in the back half of the year. Furthermore, year-over-year operating margin is expected to grow in the back half, helping the company meet management’s guidance of 31.5%.
The market is always looking ahead, so guidance is typically more important than quarterly results, which are already in the rear view.
Investors may also be disappointed, given that Netflix had just raised subscription prices across all its tiers, although some analysts had speculated the increase was already priced into guidance.
The stock had also been on a good run heading into earnings, likely making the margin for error slim, and Hastings’ departure could be adding some fuel to the fire.
While the guidance is undoubtedly disappointing, I remain bullish on Netflix in the long term, given its dominance in the streaming industry, ambitious content-generation plans, and strong organic growth in recent years.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.