Netflix gets sued over Q2 subscriber losses

Netflix sign Los Gatos
Netflix whiffed hard on its subscriber growth forecast for the second quarter of 2019, but expects to bounce back in the third quarter. (Netflix)

Adding insult to injury, Netflix is being sued by shareholders after the company missed its subscriber growth projections for the second quarter by a wide margin.

After the first quarter, Netflix predicted it would add 5 million new paid memberships during the second quarter. Flash forward to last week when the company reported additions of 2.7 million, including a net loss of approximately 130,000 domestic subscribers, for the second quarter.

The shocking results drove down Netflix stock more than 11% in the hours immediately following the earnings announcement. And now, the company is getting sued on top of it.

Johan Wallerstein filed a complaint in California federal court against Netflix, CEO Reed Hastings and CFO Spencer Neumann. The class action suit alleges that Netflix’s April 2019 letter to shareholders included “materially false and/or misleading” statements that did not disclose the potential impact of factors including price increases and content releases on subscriber growth figures.

RELATED: Netflix shows weakness as it loses 130K U.S. subscribers

According to Variety, a shareholder lawsuit after a disappointing earnings report is not a surprising development. The publication spoke with a legal expert who said that Netflix would likely respond by attempting to get the suit tossed and, if that doesn’t work, would likely settle the complaint.

During last week’s earnings call, Netflix CFO Spencer Neumann acknowledged the potential impact that price increases (between $1 and $2 per month) during the quarter may have had on Netflix’s subscriber growth but said that any side effects are worth it since price hikes are revenue accretive.

“While there may be some short-term slowdown in subscriber growth because of pricing, that increased revenue is very good for our business and ultimately for our members because we reinvest the bulk of that back into great content and great product experience for our members,” Neumann said, according to a Seeking Alpha transcript.

After the fallout from the second quarter, Netflix is hoping that hits like “Stranger Things” will put its subscriber growth trajectory back on track. The company expects to add 7 million paid memberships (800,000 in the U.S. and 6.2 million internationally) in the third quarter.