Netflix ()
Following second quarter earnings which were anything but spectacular, shares of Netflix (NFLX) are taking a drubbing, as investors consider whether the easy growth has come and gone and subscriber gains are going to be a lot harder to come by in the future.
While the early hot-takes while harp on that (and there is some truth to those points), there are more gains to come for Netflix -- it's just going to come from different places.
Los Gatos, Calif.-based Netflix added just 1.68 million subscribers in the quarter, well below its own forecast of 2.5 million additions and well below the Street's forecast as well. Of those 1.68 million, just 160,000 came from the U.S., the lowest level in five quarters and certainly indicative of a poor trend. Especially troubling is this line that CEO Reed Hastings wrote in the letter to shareholders:
"We are growing, but not as fast as we would like or have been."
For a company that relies on its ability to access the debt markets and generate cash flow to pay for its enormous content acquisition costs ($6 billion in 2016 alone), the lack of growth is certainly a troubling, if not worrisome trend.
Hastings noted that the price hike, which is slated to come for customers who have been grandfathered in to old pricing schemes, has hurt the company's perception domestically. He even went so far as to blame the media for the reporting of the hike, after having blamed chip cards in a previous quarter for another subscriber forecast miss.
Despite the lack of growth domestically and even the shortfall in international (where it added 1.5 million subscribers compared to a 2 million subscriber addition forecast), the company is still extremely confident it can get to 60-90 million subscribers domestically, which would leave it at least an additional 15-45 million subscribers in the U.S. and countless millions across the world.
Hastings and team are confident the team still has a long run ahead, emphasizing heavily that the "churn of ungrandfathered subscribers was modest and conformed to expectations," indicating it wasn't anything to worry about from long-time subscribers.
The company continues to add compelling content at a high rate, most recently shows like Stranger Things, the latest season of Orange Is the New Black, Bloodline, as well as inking a deal with the CW to accelerate the streaming window for such popular shows as The Flash, Arrow, Crazy Ex-Girlfriend, among others so that subscribers can get access to show just eight days after the season finale airs.
There are additional reasons for optimism, even though the company expects to add just 2.3 million subscribers in the third quarter, with 300,000 coming domestically.
The recent announcement of Comcast and Netflix bringing the streaming service to its X1 set top boxes should be a boost, even though Hastings characterized it as a modest boost, since he is unsure of timing. The company continues to add content at an extremely high rate, much of it acclaimed, as the company has 54 Emmy nominations this year, up from 34 last year.
International is still a huge growth opportunity for Netflix, even if China is increasingly becoming a murkier situation than previously thought, with a Disney streaming service as well as Apple's movie service shut down in the world's most populous country.
The long-term picture for Netflix is intact, even if there's going to be more volatility in the interim (something Hastings acknowledged, as shares fell 15% in after-hours last night). It's just going to be harder for it to achieve its lofty goals than previously thought.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
