Imagine doing your best to warn those around you that something bad is about to happen, but still getting looks of shock when that thing you clearly warned about actually did happen.
That’s basically what happened to Netflix after it reported its Q2 ‘20 earnings, which beat Wall Street’s subscriber addition estimates (8.6 million) with 10 million new paying members joining the service over the April-June quarter, but missed on earnings ($1.59 EPS vs. $1.81 expected) and gave lower than anticipated guidance for Q3 sub adds (2.5 million vs. 5 million expected).
Netflix’s stock dipped as much as 15% in late trading, signaling investors’ disappointment with the growth outlook the streaming giant gave for the months ahead.
This stock dip isn’t all too surprising, as investors should be wary of slowing growth. But the problem with this is Netflix correctly predicted its monster Q1 would eat up H2 ‘20 growth and in April warned investors that it expected viewing and growth would decline. As we wrote a few months ago, Netflix clearly went out of its way to make sure investors didn’t get too excited after its Q1 earnings.
So it’s not like the magnitude of its Q3 subscriber forecast should be perceived as something completely out of left field.
And on top of that, it’s not like slowing growth in Q3 would be a new phenomenon for the company.
Even with the massive 15.8 million global sub addition in Q1 ‘20, Netflix’s year-over-year (YoY) growth rate that quarter was still 23%, slightly down from the 25% year-over-year growth the company experienced in the COVID-19-less Q1 ‘19.
Take this thinking one step further: Even if Netflix does add the Wall Street-disappointing 2.5 million subs in Q3, its YoY growth rate would still be 23%, which is slightly up from the 21% YoY growth rate in the same period one year prior.
Under this lens, Netflix’s Q2 ‘20 shareholder letter statement — that it’s already almost added as many subscribers as it did in all of 2019 (26 million subs in H1 ‘20 vs. 28 million in 2019) — seems less like just a smokescreen.
The performance of Netflix’s stock after the company’s earnings call signals what an unfortunate blessing that its Q1 ‘20 earnings were: It brought Netflix 15.8 million subscribers, but the subsequent 2020 paid subscriber additions per quarter can’t help but now look paltry.
The focus on weaker-than-expected Q3 guidance from Netflix also seemed to take away from discussion of the fairly significant news that, you know, the company now has two CEOs.
Couched in one short-and-sweet paragraph at the beginning of its letter to shareholders, the company announced that longtime chief content officer Ted Sarandos was being made co-CEO with Reed Hastings.
You might argue this isn’t earth-shattering since Hastings did say that the change “makes formal what was already informal,” as he and Sarandos have worked together for so long.
But as Bloomberg has pointed out, co-CEO arrangements don’t necessarily have the strongest track record, which may be a point of slight worry for investors.
Still, Hastings did make it abundantly clear he doesn’t plan on leaving any time soon (mentioning he was “in for a decade” twice on the earnings interview). So it seems like there will be ample time for the Hastings-Sarandos duo to lead Netflix out from under the giant shadow its Q1 earnings results created.