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

Stranger Things
Netflix hopes hits like "Stranger Things" lead a return to growth in the third quarter. (Netflix)

Subscriber growth is still the key metric by which Netflix’s performance is measured, and by that standard, the company just posted some disastrous second-quarter results.

The company added 2.7 million paid memberships, dramatically fewer than the 5 million it had forecast. Moreover, the company posted a net subscriber loss (down approximate 130,000) in the U.S. for the first time since 2011. The company pegged the losses and forecast miss on a weaker content slate during the quarter, and promised the third quarter would see a return to growth. With help from the hit new season of “Stranger Things,” Netflix expects to add 7 million paid memberships (800,000 in the U.S. and 6.2 million internationally) in the third quarter.

During the company’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.

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Whatever the reason for the subscriber growth miss, Netflix is feeling the effects in the stock market, where its shares plummeted more than 11% since close of market Wednesday.

Barclays analyst Kannan Venkateshwar said that by missing so badly on its second-quarter subscriber forecast, Netflix runs the risk of losing credibility with its forecasts going forward. He also noted the upcoming loss of important licensed content combined with the launch of new competitors like Disney+ will make the next few quarters crucial for the company.

“We believe the next three quarters are likely to be pivotal for the next phase of the NFLX story – another bad quarter will probably make it tough to make a pricing power argument but if the company is able to add more subs this year than last year and into Q1'20, there would be no credible bear case left in the story, in our view,” wrote Venkateshwar in a research note. “Therefore, in some ways, the next three quarters could define the next phase for the stock.”

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MoffettNathanson analyst Michael Nathanson said that if Netflix’s third-quarter subscriber forecast holds up, the company’s domestic net subscriber adds will still be pacing at 60% of 2018, amounting to the first meaningful year-over-year deceleration for the company.

“In other words, the S-Curve in the U.S. may be finally flattening after all these years of growth,” wrote Nathanson in a research note. “As such, it will increase doubts about Netflix’s final resting subscriber base,” adding that the number could be closer to 80 million rather than the 88.4 million MoffettNathanson assigned in its previous valuation for Netflix."

Neil Begley, lead Netflix analyst and senior vice president at Moody’s, said Netflix’s weak second-quarter subscriber additions are symptomatic of a maturing U.S. market for the company, seasonal volatility and the growing importance for Netflix to maintain a steady string of hit content releases.

“Still, we remain confident that Netflix will continue to grow subscribers year over year, reaching 200 million paid streaming subscribers in FY 2021. We also project that the company has the ability to reach cash flow break-even by 2023 as it grows total margins to the low to mid 20% range,” wrote Begley in a research note. “However, we believe that initial low-priced new streaming entrants such as Disney+ will garner subscriber attention, which could limit Netflix’s future pricing power until those new entrants reach parity in price and new content.”