Disappointing subscriber numbers for the second quarter
shaved $15 billion from Netflix Inc.’s market value as trading opened Thursday.
Shares of the streaming-video service fell as much as 11%, their biggest drop
since July 2018. Netflix signed up 2.8 million international customers in the
quarter, almost two million fewer than expected. The company also lost 130,000
domestic subscribers as a result of higher prices and a weak slate of TV shows.
For comparison, $15 billion is more than the value of about a third of the
companies in the S&P 500, including American Airlines Group Inc. and Viacom
Inc.
Netflix Inc. shocked investors by reporting a drop in U.S. customers and much
slower growth overseas, raising fears that the streaming giant is losing
momentum just as competitors prepare to pounce.
The shares plunged as much as 12% to $320.30 in New York Thursday, tumbling
toward the worst one-day drop in three years, after the company reported a loss
of 130,000 customers in the U.S. Netflix blamed higher prices and a weak slate
of TV shows. It signed up 2.8 million subscribers internationally in the
period, roughly half what the company predicted.
“Netflix has a difficult road ahead, with looming competition and the removal
of popular content,” said EMarketer Inc. analyst Eric Haggstrom. But a stronger
lineup of new shows in the current quarter could help attract former
subscribers, he said.
Can Netflix Rebound?
The quarter represents the biggest black eye for Netflix since 2011, when the
company split its DVD-by-mail business from its streaming business. That move
raised prices for its customers, and resulted in the loss of more than 800,000
subscribers in the U.S. The company had planned to call the DVD service
Qwikster, but it backpedaled on the plan after investors and customers scoffed
at the idea.
Netflix said the miss is a one-time blip rather than a long-term problem. The
second quarter has typically been its weakest time of year: The company missed
its forecast during the period in three of the past four years.
Netflix looks to add 7 million subscribers in the current quarter, thanks in
part to the return of top shows “Stranger Things” and “Orange Is the New
Black.”
“Our position is excellent,” Chief Executive Officer Reed Hastings said during
a videoconference call Wednesday. “We’re building amazing capacity for content.
Our product has never been in better shape.”
Several analysts agreed that the second-quarter disappointment should be only a
temporary hiccup for Netflix. Investors should “aggressively buy the stock” on
weakness, especially below $325 a share, Loop Capital said.
Heavy Spending
For now, the second-quarter shortfall is renewing investor concern about
the company’s heavy program spending and low profitability. Netflix shelled out
more than $3 billion on programming in the quarter and another $600 million to
market its shows. The company spent $594 million more than it took in and will
need to raise money to fund programming.
Investors had been forgiving about the spending and the debt — so long as
customers grew at record rates. But the loss of subscribers in the U.S. was the
first since the Qwikster debacle, and it suggests Netflix may be running into
price resistance or the limits of the addressable domestic market. The company
has forecast it can reach as much as 90 million customers in the U.S., compared
with 60.1 million currently.
Overseas Slowdown
International results flagged too, with the company missing its own forecast of
4.7 million new subscribers. Europe, Latin America and Asia have been the
primary drivers of Netflix’s customer acquisition in recent years, and growth
must be sustained if the company is to justify its high valuation.
Netflix is introducing a cheaper, mobile-only package in India to attract
customers in a big market with price-sensitive customers.
Analysts expect the company to have a blockbuster second half because of a
heavy release schedule that includes a new season of “The Crown” and movies by
directors Martin Scorsese and Michael Bay. Even after the slowdown last
quarter, Netflix still thinks it can have its best year of customer growth in
2019.
But competition is coming. Walt Disney Co. and Apple Inc. plan to introduce
streaming services this year, while offerings from Comcast Corp. and AT&T
Inc. arrive in 2020. Those services may not steal users from Netflix, but they
will make future growth harder, according to Michael Pachter, an analyst with
Wedbush Securities.
Just a Preview?
“We saw a preview of next year with this quarter,” Pachter said in an interview
with Bloomberg Television. “Next year, they’ll have a couple quarters where
they’ll lose subscribers.”
Another challenge: Competitors are taking back rights to programs that have
been popular on Netflix, including “Friends” and “The Office,” to use for their
own services. That will force Netflix to rely even more on its original
productions.
Those efforts have largely been successful. Its shows just earned 117
nominations for the 2019 Emmy awards. But reruns of old shows still constitute
the majority of viewing.
The slowdown in users overshadowed the company’s quarterly financial results.
Earnings for the second quarter fell to 60 cents a share, but beat analysts’
estimates of 56 cents. Sales grew 26% to $4.92 billion, compared with
projections of $4.93 billion.
The stock had been up 35% for the year at the close of regular trading, nearly
double the gain of the S&P 500. The decline spread to related stocks such
as Roku Inc., which makes set-top boxes that deliver the streaming service. Its
shares fell as much as 2.5%.
Bloomberg
