Netflix Stock Plummets on Q2 Results

Jul 17, 2019
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Netflix grew half as much as expected in the quarter, sending the stock falling 10% after revealing Q2 results.

Netflix Subscriber Growth

The reasons analysts are providing for the stock drop revolve completely around the amount of paid subscription growth Netflix (NASDAQ:NFLX) had this quarter. Netflix had estimated they would have 5 million and ended up with 2.7 million, to compare, in Q2 2018 which saw 5.5 million. In 2018 Netflix began to drop the term net additions, as this would include free trials, and solely focus on paid subscribers rather than the total number. The biggest difference in year over year is the apparent slowdown in growth, while Netflix is still growing the pace of adding paid subscriptions is less than last year. Netflix additions quarter to quarter in 2019 are around 21% compared to 25% in 2018. Below is a simplified breakdown from their letters to investors:

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Knowing that slowed growth would be the biggest topic about the earnings on the quarter Netflix tried to ease investors mind preemptively with the below statement:

Our missed forecast was across all regions, but slightly more so in regions with price increases. We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region). Rather, we think Q2’s content slate drove less growth in paid net adds than we anticipated. Additionally, Q1 was so large for us (9.6m net adds), there may have been more pull-forward effect than we realized. In prior quarters with over-forecasts, we’ve found that the underlying long-term growth was not affected and staying focused on the fundamentals of our business served us well.

Source

Global Price And Other Financials

During the last year, almost every market received a price increase by Netflix increasing their ARPU (average revenue per user), with an average of 9% consisting of 12% in the U.S. and 7% in international markets after FX is accounted for. This increase in price helped the company grow their operating margin to 14.3%, they also attributed some of the margin increase to shifting some of the marketing spend to later in 2019 to support content launches later in the year. Content licensing obligations fell 2% on the quarter, which is important as Netflix is bolstering their original content library to better compete in the future. Finally, they believe access will be very important to their future, by bundling with other service providers including cable companies they believe they can reach more subscribers who might not be inclined to seek out and set up the service on their own.

Competition

Netflix attributed almost none of the subscriber trouble to additional competition, they cited almost no material change in the competitive landscape globally, only small players in specific geographic regions. The increase in original content will help combat the upcoming release of Disney+ (NYSE:DIS) (which has already been very detailed). There is only so much space in the streaming market and as we have noted consolidation will have to start eventually just the timing is up for debate, Netflix appears to be in a good position to compete globally. There are few companies with the market share and brand recognition of Netflix in any industry, in the long term access and the content will determine the winners in the streaming wars and it is far too early to tell. We are looking forward to Q4 results this year which will see Disney+ in the competitive landscape and will be the true test if Netflix can grow their domestic market still.

 

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