Tesla and Netflix Stocks Crushed! Were Earnings that Bad?

If you're looking to take your investing knowledge to the next level, make sure to check out our latest free courses offered on mainstreetwolf.com!

Market News and Short-Term Predictions

We are entering that exciting time of the year again where each week brings up new information/data to analyze in the form of quarterly earnings.

This week I wanted to discuss TSLA (on my watchlist) and NFLX (not currently on the watchlist) as they were down big after reporting Q2 results.

TSLA Results came in the following:

• Tesla press release (NASDAQ: TSLA): Q2 Non-GAAP EPS of $0.91 beats by $0.09.

• Revenue of $24.93B (+47.3% Y/Y) beats by $200M.

• Capex: $2.06B vs. $2.07B in 1Q23. FCF: $1B vs. $441M in 1Q23.

• Tesla confirms new record deliveries of 466,140, beats expectations

The company reported record production and deliveries, with a focus on achieving full self-driving capabilities. The Cybertruck, Supercharging network expansion, and battery technology were all hot topics as those are areas of potential growth.

Tesla's financials were strong, with a 20% jump in profit to $2.7 billion, thanks to cheaper materials offsetting price cuts. However, the market reacted with a dip in share price due to concerns over slightly lower future production and reduced average sales prices (which would be part of the reason we see a drop in operating margin).

Despite the market's reaction, Tesla's future looks bright, with partnerships with General Motors and Ford for its charging infrastructure and possibly a way to charge an OEM for FSD.

With all that said, the valuation is pricing Tesla for major growth. While the growth they are showing is impressive, in order to invest I need to see profitability enjoy the same growth that they are seeing on the topline. With a P/E in the 70s, I would like to see profits growing closer to 35% to get the PEG ratio at least to 2. For now, it remains on the watchlist for me.

They either need to unlock a new source of revenue or the valuation needs to come down for me to be comfortable with owning it. Also, one risk for Tesla is sensitivity to these higher rates which is a concern of mine.

With loans getting more expensive around the world, it is harder for more and more people to keep buying their cars which hate it or not, is their main source of both revenue and profit.

It remains there is some speculative valuation baked into Tesla for its potential around AI/self-driving.

Turning my eyes to Netflix, it is a much different story than Tesla. I believe the company is currently transforming into a cashflow cow instead of focusing on growth in the long term. Let's dive into why I think that.

Here are the latest earnings from Netflix:

• Netflix press release (NASDAQ: NFLX): Q2 GAAP EPS of $3.29 beats by $0.44.

• Revenue of $8.19B (+2.8% Y/Y) misses by $100M.

• Revenue growth was driven by a 6% increase in average paid membership, while ARM declined 3% year over year (-1% 2 F/X neutral).

• Global streaming paid memberships: +5.89M to 238.39M.

• Q3 Guidance: Revenue of $8.52B ($8.68B consensus), up 7.5% Y/Y, operating income of $1.89B, and Diluted EPS of $3.52 vs. $3.23 consensus.

With the recent launch of cracking down on account sharing, it appears the net effects are working out for Netflix as they continued to have a net addition of users.

I believe Netflix has reached a point where it doesn't know where to grow from here as they are a mature company. That is part of the reason they are targeting users who are sharing accounts as we see projected growth at 13% in earnings in Q3 based on the additional revenue.

While I think the move to generate more income is a solid move in the short term, it screams to me that they may be running out of steam when it comes to growth. If they are in most households already, where will they grow? They will need to either increase prices on their consumers or introduce new revenue streams. That is why I think they have a floor to the stock which is great for shareholders, but I don't see where I would want to buy the stock unless it traded at a P/E of around 15-20.

It looks like I missed my chance last year (I'll admit I missed an easy one there with all the panic) in this name for a nice contrarian buy. At a P/E of 46, I couldn't justify buying this name. There is just too much competition in the content space and I need to see them give me a vision of where their growth will come from. If they can't provide that vision, that's absolutely fine, but I would want a cheaper valuation then :)

Also if you are a shareholder in either TSLA/NFLX you can't complain too much about these pullbacks after the earning with both of them being up over 100% in 2023. If anything, these are healthy pullbacks regardless if I think they may be a bit overvalued at the current moment.

As for the general market, we continue to trade at elevated RSI levels for SPY. But I think any pullback to the 50 DMA will provide a good entry point for any short-medium term trades to the upside.

Lessons to Be Learned

While I believe it is important to look at earnings reports, I think it is important to remember to think longer term rather than focus on how the stock reacts a day or even a week after the numbers come out. One report doesn't make a trend and it would cause chaos to a portfolio to switch in and out of positions based on one quarterly earnings.

At the end of the day, as long-term investors, we are making decisions based on a set of assumptions including growth rates, valuation reasonableness, economic moat, cost reductions, and macroeconomic sensitivity. We place our capital where we think is best at the current moment in time based on those assumptions, but we should have the conviction to hold for at least a few quarters before switching our thesis on a dime.

There are always exceptions though! Such as a black swan event like Covid. Also if there are drastic changes from the initial assumptions for investing in a company. For example, a growth company saying it is going from 40% revenue growth to 0%, would be more of a major shift in assumptions vs. 40% growth to 35% growth.

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, ENPH, LLY, CHDN

Options: SPLG, PLTR, BAC, MPW, F, AAL, T

See premium membership for details on interested entry points/strike prices.

Options Trading Portfolio

Closing Trades

I was able to close a quick winner in a BAC put I sold at the end of last week for $27. I also had to close an iron condor that got blown out to the upside from selling in mid-May for a max loss of $302.

If you don't want to miss out on the following: weekly buy/sell activity in the stock/option portfolios (Excel Spreadsheet with full details), real-time alerts through Discord, and access to premium courses & tools check out the premium membership. Start your 7-day free trial today!

If you want to score 1 FREE month of premium membership, refer 3 friends/family/coworkers who would enjoy the weekly investing newsletter!