After four consecutive quarters of subscriber growth that soared past forecasts, Netflix Inc. did not live up to expectations with a report Monday that slammed the stock on fears that subscriber growth may have peaked.
The streaming media giant reported disappointing second quarter results and a weaker than expected outlook after markets closed Monday. Netflix NFLX, +1.18% disclosed about 1 million fewer new subscribers in the second quarter than it had projected, and said it expected subscriber growth to decline year-over-year in the current quarter. Shares, up about 115% this year compared with a 4.5% gain in the S&P 500 SPX, -0.10% tumbled 13% in after-hours trading.
“We have seen this movie before,” Netflix Chief Executive Reed Hastings insisted, referencing a second-quarter shortfall in 2016 that devastated Netflix shares at the time.
While it’s true that Netflix has similarly missed estimates before, this time could be different. If this quarter’s forecast proves more accurate than the last, it would mean two straight quarters of stagnant or declining user growth for Netflix, which has never experienced that type of stall for more than one quarter at a time. The company’s forecast for global net additions of 5 million in the third quarter, compared with 5.3 million a year ago, is scary, as Netflix has not seen additions at that low a level since the first quarter of 2017.
Netflix has not been very accurate with its forecasts, however: Monday’s shortfall of 1 million subscribers follows two blowout quarters in a row of beating its own estimates by 1 million and 2 million new subscribers. That leaves investors to wonder if this was a short-term correction following two very successful quarters or a harbinger of doom.
Netflix has been intensely focused on continuing to build out its international businesses and the bulk of its bigger subscriber growth in the last few quarters has come from outside the U.S., as an audacious international expansion has juiced the numbers. Just one year ago, its total number of international subscribers surpassed domestic subscribers, and the second quarter was the first in which international revenue topped domestic sales.
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In the second quarter it reported on Monday, 4.5 million of Netflix’s 5.2 million new subscribers came from overseas. If that flow of new subscribers slows down as Netflix laps the international rollout, the company could have trouble finding new areas to expand.
Hastings insisted that it is still early days for Netflix in many markets, especially India, where many people still watch broadcast TV and he said, “We have a long way to go.” The executives touted a new film and two new shows for the Indian market.
As Netflix has grown, its new subscriber additions have hit ever increasing numbers. In the fourth quarter, Netflix added 8.3 million new subscribers, a number it has yet to surpass. The company does not disclose how many subscribers leave the service, and when asked about retention levels last quarter, Netflix Chief Financial Officer David Wells said in established markets the company was “getting pretty close to asymptotic churn,” possibly meaning churn had hit its limits.
Netflix has a lot more streaming competitors now, as older media companies like The Walt Disney Co. DIS, +0.18% and tech competitors like Apple Inc. AAPL, -0.22% and Amazon.com Inc. AMZN, +0.52% try to catch up. With giants like that attempting to steal potential growth, Netflix needs to prove to investors that the movie they saw on Monday is just a rerun and not a teaser trailer for what is to come.
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