Why are Netflix investors flinching at the scary bits?

17 Jul 2018

Inside the Netflix LA offices. Image: Netflix

Netflix investors are worried that the stalwart streaming giant’s growth might not be epic enough.

A shortfall in subscriber growth in Netflix’s latest quarterly earnings has spooked investors.

The streaming video platform recorded strong enough revenue and profits but the slump in subscribers has led to fears that growth is slowing.

‘Our strategy is to simply keep improving, as we’ve been doing every year in the past’

It added 5.2m subscribers between April and June, about 1m fewer than analysts had forecast. As a result, the company’s stock plunged 14pc in overnight trading.

“We had a strong but not stellar Q2, ending with 130m memberships,” CEO Reed Hastings wrote in a letter to shareholders.

“Membership growth was 5.2m, the same as Q2 last year, but lower than our 6.2m forecast.

“Earnings, margins and revenue were all in line with forecast and way up from prior year. Internet video is growing globally and we are fortunate to be one of the leaders. In addition to succeeding commercially, we are starting to lead artistically in some categories, with our creators earning enough Emmy nominations this year to collectively break HBO’s amazing 17-year run.”

Indeed, the streaming giant itself has had an epic enough run on the stock markets, with 10 quarters of solid growth. Netflix was also the second-highest performer on the S&P 500 Index.

However, it appears investors are a fickle lot and don’t like it when they come to the scary parts of the story.

Is Netflix reeling them in?

Netflix is still the global leader for streaming video and has budgeted $8bn for programming and $2bn for marketing in 2018.

Indeed, it emerged in recent days that the cost of adding domestic subscribers on its US home soil has shot up in recent years, costing Netflix $100 per net new subscriber according to research from Ampere Analysis.

In the latest quarter, the company added 670,000 subscribers in the US, far below analysts’ estimates of 1.9m subscribers.

It signed up 4.47m subscribers internationally while analysts were expecting 4.97m new subscribers.

Revenues came in at $3.9bn, up from $2.7bn last year, and Netflix is forecasting third-quarter revenues of $3.9bn.

The streaming giant recorded a surge in profits to $307m, up from $66m this time last year. Despite this, investors were still underwhelmed by the growth in subscribers.

In some ways, the company is a victim of its own forecasts and admitted that it over-forecast global net additions by 1m, as they came in at 5.2m rather than 6.2m. While this may have spooked investors, it is still flat compared with a year ago.

“Paid net adds totalled 5.5m in Q2, compared with 4.7m last year and forecast of 6.1m,” Hastings told shareholders.

Looking to the third quarter, he forecast net adds of 5m, down from 5.3m last year, with around 650,000 new subscribers in the US and 4.3m internationally.

Content is king and The Queen

Crucially, the game-changer will be content and the company has renewed a second season of Lost in Space as well as 13 Reasons Why and other original series Santa Clarita Diet, A Series of Unfortunate Events, Marvel’s Jessica Jones, La Casa de Papel (Money Heist), Glow and Marvel’s Luke Cage.

Hastings said the company also ramped up production of non-English originals including 3%, a Brazilian sci-fi original, and The Rain, a Danish thriller, which have both received global acclaim.

“This serves as another data point that our international originals can be important to specific countries and regions and also play well outside of their home markets. Late in the quarter, we launched Lust Stories, a new Indian original film, which has been a major success as our largest watched original in percentage terms in any individual market in its first month.”

Hastings said the company is achieving success with its original movies such as Set It Up and The Kissing Booth.

He also noted that the streaming space has evolved and is getting very competitive. The way the company intends to compete, he said, is to keep innovating and improving.

“YouTube and Netflix are two leading global (ex-China) internet entertainment services. HBO and Disney are evolving to focus on internet entertainment services. Amazon and Apple are investing in content as part of larger ecosystem subscriptions.

“Each of these firms has unique content and is striving to find the best creators from around the world to entertain its viewers. There has never been a better time to be a creator or consumer of content.

“We believe that consumer appetite for great content is broad and that there is room for multiple parties to have attractive offerings. We anticipate more competition from the combined AT&T-Warner Media, from the combined Fox-Disney or Fox-Comcast as well as from international players like Germany’s ProSieben and Salto in France.

“Our strategy is to simply keep improving, as we’ve been doing every year in the past,” Hastings said.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years