Coverage: Netflix falls after subscriber growth misses estimates

Netflix Inc. took an unexpected drubbing Monday on Wall Street amid signs that the company’s once torrid growth may be slowing as it faces rising competition.

David Ng of the Los Angeles Times had the news:

The global streaming giant attracted fewer new subscribers than anticipated in the second quarter, causing shares of the streaming entertainment giant to tumble 14% in after-hours trading Monday.

The Los Gatos, Calif., company said it ended the quarter with about 130.1 million subscribers worldwide, falling short of analysts’ expectations of 130.8 million subscribers for the period. It said it added 5.2 million members during the period — the same as last year’s quarter — but lower than the 6.2 million it forecast.

Domestic subscriber growth was particularly weak, suggesting that Netflix is seeing a dramatic slowdown in the U.S. market. Netflix added 670,000 new U.S. subscribers for the quarter, falling short of the expected 1.2 million that the company had forecast.

“Most bulls thought that [Netflix] could grow to 85 million domestic subscribers, but the slowing growth might suggest that the ceiling is closer to 70 million. That means less upside and less growth, which impacted the share price,” said Michael Pachter, managing director of equity research at Wedbush Securities. He has an “underperform” rating on Netflix stock.

Michelle Castillo of CNBC.com reported that Netflix also missed revenue projections:

In addition to a slight miss on revenue compared to estimates, Netflix posted a huge miss on subscriber additions. The company only added 5.15 million subscribers, about one million less than forecast. Domestic additions were only a little more than half of its projections, while it just added 4.5 million subscribers internationally.

Netflix reported:

• Revenue: $3.91 billion vs. $3.94 billion estimated, according to a Thomson Reuters consensus estimate.

• Domestic subscriber additions: 674,000 vs. 1.23 million subscribers estimated, per FactSet and Street Account

• International subscriber additions: 4.47 million subscribers vs. 5.11 million subscribers estimated, per FactSet and Street Account

• Earnings per share (EPS): 85 cents (including $85 million in non-cash unrealized gain). It was not immediately clear if Netflix’s reported EPS was comparable with a Thomson Reuters consensus estimate of 79 cents.

Some analysts were worried the company could not sustain its share price growth, which is over 100 percent year-to-date. They also raised concerns as competitors like Amazon ramp up their streaming efforts, while others like Disney and AT&T are prepared to invest in more digital content. Netflix is expected to spend up to $8 billion this year on 700 original series.

Dade Hayes of Deadline reported that Netflix executives shrugged off the misses:

“The fundamentals have never been stronger,” CEO Reed Hastings said, citing record levels of viewing and positive trends in many global territories. “We’re feeling very strongly about the business.” He added that the dip in the second quarter was unrelated to price increases in recent months, and is not unprecedented. “We’ve seen this movie before of a Q2 shortfall, two years ago. We never did find an explanation to that, other than there’s some lumpiness in the business, and we continued to perform after that.”

CFO David Wells said the results would not cause any kind of reassessment of internal forecasting or fiscal management. “Long-term, nothing’s really changed,” he said, emphasizing the company’s focus on 12-month rolling results, which he described as healthy despite the quarterly dip.

Asked about threats posed by rivals, especially in an industry obsessed with M&A lately, the exec team seemed sanguine. “There’s a lot of new and strengthening competition, with Disney coming to market and HBO getting additional funding and the different French broadcasters coming together. That’s all normal and expected,” Hastings said. “It is what it is and we’re not going to be able to change it. Our focus is on doing the best content we’ve ever done, having the best user interface, the best recommendations, the best marketing.”