×
You will be redirected back to your article in seconds

Netflix Shares Dive After Q2 Stumble: Just a Hiccup or Sign of Bigger Trouble?

Netflix badly undershot its subscriber forecasts for the second quarter of 2019 — posting its first net U.S. customer decline since 2011 while growth slowed considerably overseas. The company added 2.7 million subs worldwide, almost half as many as the 5 million it had projected.

With the big miss, Netflix shares took a predictable hit, opening down 10% on Thursday. The stock closed -10.3% for the day, to a six-month low of $325.21 per share — representing a loss of about $16.5 billion in market capitalization. The question Wall Street analysts are debating: Are the Q2 results a sign the wheels are coming off the streaming giant, or merely a blip on the long-term road to continued growth?

Most analysts said there’s no reason to panic, pointing to Netflix’s reiteration that for the full-year 2019 it expects to add more subscribers than last year (when it gained 28.6 million worldwide).

Netflix CEO Reed Hastings, in the company’s earnings video interview Wednesday, tried to project confidence in the long-term model. “We’re building amazing capacity for content,” he said. “Our products have never been in better shape. Our rate of investment is extremely high. So if investors believe in internet television, which I think is an easy one to get there, then our position in that market is very strong.”

Netflix attributed the Q2 miss to price increases — including in the U.S. — as well as a light content lineup. Some analysts agreed with this view: “The lack of marquee hits likely contributed to lower-than-expected net adds, leaving room for improvement in Q3 given more impactful content slate,” Cowen & Co. analyst John Blackledge wrote in a note.

Blackledge remains positive on Netflix’s growth potential given strong initial Q3 subs trends and the company’s content slate for the second half of 2019, which includes in the third quarter “Stranger Things” season 3, “Orange Is the New Black” season 7, “La Casa de Papel” season 3 and “Mindhunter” season 2.

But other analysts seem storm clouds brewing.

The lower-than-expected Q2 results show Netflix will have increasingly tough sledding in the U.S., according to Wedbush Securities analyst Michael Pachter, who’s notoriously bearish on the company (with a longstanding “underperform” rating). In a note, the analyst said he remains skeptical that Netflix can turn free cash flow positive in the next five years.

“Netflix has already penetrated the majority of its above median-income household addressable market at 60 million subscribers,” Pachter wrote, “and with competition from Disney Plus, [WarnerMedia’s] HBO Max and Comcast [NBCUniversal], we expect the company to have difficulty meaningfully growing its domestic subscriber base.”

Moreover, Netflix’s acknowledgement that the price increases hurt subscriber growth in the quarter also raises the question of its pricing power, MoffettNathanson’s Michael Nathanson observed. “As more studios pull content from Netflix, the platform moves from being a digital video store in the cloud with unlimited versions of all your favorite shows to a premium cable network on steroids,” he wrote in a note.

Investors shouldn’t “overreact” to Netflix’s Q2 miss, opined Morgan Stanley’s Ben Swinburne. He noted the second quarter is seasonally “a light TV viewing quarter” in general and noted that the magnitude of the subscriber miss was in line with Netflix’s previous misses. And while the price hikes may have boosted churn levels, the price increases drove strong revenue and earnings growth — revenue was up 26% in the period, and Q3 guidance points to over 31% growth.

“In aggregate, the combination of a seasonally light viewing quarter, seasonally light content slate (content tends to be packed around awards season), material price increases, and ease of cancelling/rejoining may have created a bit of a perfect storm,” Swinburne wrote in a research note.

In the video interview for investors, Netflix CFO Spencer Neumann said “there’ll be some quarter-by-quarter choppiness along the way based on things like seasonality and content slate and so forth.”

Bolstering the “choppiness” argument, Netflix guided global net adds of 7.0 million for the third quarter (6.2 million overseas and 800,000 U.S.) — higher than Wall Street had expected. Netflix’s Q3 guidance “should provide another crucial litmus test for the underlying growth trajectory,” CFRA Research analyst Tuna Amobi wrote. He maintains a “buy” rating on the stock but cut 12-month price target by $25, to $400 per share.

Other analysts were unperturbed by the Q2 sub miss. “We see the long-term trend as largely on track (especially the broader revenue trend),” wrote BMO Capital Markets’ Dan Salmon, whose stock picks in the “global streaming race” are Netflix, Amazon and Disney.

Indeed, the stock drop represents a buying opportunity for investors, according to Jeff Wlodarczak, principal analyst at Pivotal Research Group. Anticipating a rebound in subscriber growth in the second half of 2019, the analyst boosted the price target on the stock by $15, to $515 per share. “The NFLX positive investment thesis remains very much intact in our view and we would use share price weakness as a purchase opportunity.”

(Pictured: Netflix CEO Reed Hastings)

More Biz

  • Firefighters Respond to Brush Fire in

    Brush Fire Threatens Homes in Los Angeles' Pacific Palisades

    Firefighters are responding to a brush fire that is threatening homes in Pacific Palisades, Calif., a wealthy neighborhood on the city’s West side. The homes that are threatened are on Charmel Lane and Vista Grande Drive, north of Sunset Blvd. and west of Temescal Canyon Park. TV news images shows helicopters dropping water on the [...]

  • Warner Chappell Names Shani Gonzales Head of

    Warner Chappell Names Shani Gonzales Head of International, Executive VP of A&R

    Warner Chappell Music today announced the appointment of Shani Gonzales as Head of International, Executive Vice President of U.S., A&R. Based in New York, she will report to the company’s co-chair & CEO Guy Moot. Gonzales was most recently co-head of A&R at BMG U.S. and U.K., following stints at Epic Records and Def Jam. She [...]

  • Sony/ATV Names Dana Baxter Senior VP

    Sony/ATV Music Publishing Names Dana Baxter Senior VP of Corporate Communications

    Sony/ATV Music Publishing today announced the appointment of Dana Baxter as Senior Vice President, Corporate Communications, effective November 1.  According to the announcement, in this role, she will lead all global communications strategies to further advance Sony/ATV’s evolution and mission of putting songwriters first.  She will report to Jon Platt, Chairman and CEO of Sony/ATV and will [...]

  • Variety Cord Cutting Placeholder Cable

    Fox, Charter Strike New Carriage Deal

    Fox Corporation and Charter Communications, Inc. on Monday said they struck a new “long term” carriage deal for Fox’s suite of TV networks, the latest in a recent series of agreements Fox has struck with various distributors. Financial terms were not disclosed. The pact covers distribution of Fox Television Stations, Fox News Channel, Fox Business [...]

  • netflix debt

    Netflix to Raise Another $2 Billion Through Debt to Fund Massive Content Spending

    Netflix, burning boatloads of cash with a projected $15 billion content budget for 2019, is adding to its debt load once again. On Monday (Oct. 21), Netflix announced plans to offer approximately $2.0 billion aggregate principal amount of junk bonds, in both U.S dollar and euro denominations. As of Sept. 30, Netflix reported $12.43 billion [...]

  • Luciano Bernardini de Pace, Pietro Peligra

    Variety Announces Launch of Variety Italy

    Variety has announced the launch of Variety Italy, a new Italian-language international edition that will feature original as well as syndicated Variety content geared towards an Italian audience. The partnership marks the publication’s second international edition, following the announcement of Variety China earlier this year. Variety has partnered with Web Magazine Makers, led by president [...]

More From Our Brands

Access exclusive content