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Should Investors Be Scared About Netflix's Huge Subscriber Miss?
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Shares of Netflix (NFLX - Free Report) plummeted after-hours Monday and sunk again Tuesday morning following the streaming giant’s massive second-quarter subscriber miss. But is there truly cause for concern?
The Numbers At A Glance
Netflix added 5.2 million new subscribers in the second quarter to bring its global total to just over 130 million. Investors most likely would have been happy had Netflix projected 4.2 million. Instead, the streaming TV power estimated, based on its own internal forecast, that it would add 6.2 million subscribers worldwide.
The company added 700,000 users in the U.S., which fell well short of its 1.2 million estimate and helped demonstrate just how saturated its domestic market has become. Meanwhile, Netflix added 4.5 million international subscribers. Netflix had called for 5 million new subscribers outside of the U.S.—where the company is supposed to have more room to grow.
Diving Deeper
Netflix fell way short of its own expectations, which is hardly a good sign since management should have a strong grasp on its own growth trajectory. Meanwhile, more than top and bottom line expansion, subscriber growth is vital to Netflix since it is really the only way for it to grow, aside from upping its price.
The company had topped its own subscriber forecasts in seven out of the previous nine periods, including beats in the trailing four quarters. Clearly, Netflix has a solid track record of coming in above its subscriber growth estimates. Maybe more importantly, however, is that Netflix had crushed its forecasts recently.
Netflix added 7.4 million new users in Q1, beating its estimate by 1 million. The company topped its Q4 2017 forecast by 2 million, its Q3 projection by 900,000, and its Q2 estimate by 2 million. The last time Netflix fell short of its subscriber forecast was in the first quarter of last year when it added 5 million new users when it called for 5.2 million.
Furthermore, 5.2 million new users marked flat year-over-year growth. The last time Netflix didn’t add more users than it did in the prior-year period was the first quarter of 2017 when it grabbed 5 million new users compared to the first quarter of 2016’s 6.7 million. So clearly there is nothing that novel here, it is just that this time around the miss is bigger than it has been in the recent past and follows a streak of impressive beats—which led to a massive gain in share price.
Why?
Netflix noted in its second quarter letter to shareholders that the quarterly guidance it provides is its “actual internal forecast at the time we report and we strive for accuracy, meaning in some quarters we will be high and other quarters low relative to our guidance.” The company also talked somewhat briefly about why it fell short of subscriber growth on its conference call. “After four consecutive questions of under-forecasting the business, we over-forecasted the business,” CFO David Wells said on the call.
Furthermore, the company pushed back on an analyst who suggested that Netflix’s “well-publicized, essentially global” price hike might have played a role in the big miss. The firm’s CFO noted that Netflix rolled out various price increases in many markets around the world in 2017, and said that he didn’t think higher costs contributed to Q2’s miss.
“We've seen this movie of Q2 shortfall before about two years ago in 2016,” CEO and founder Reed Hastings said. “We never did find the explanation to that, other than there's some lumpiness in the business and continue to perform after that.”
Looking Ahead
Netflix’s executives did not have a great answer for why the company fell 1 million subscribers short, which is part of the reason for Tuesday’s continued dip. Meanwhile, the streaming TV market has become increasingly crowded, especially in the U.S., with Amazon (AMZN - Free Report) , Hulu, and others expanding.
Netflix closed the quarter with 130.14 million subscribers worldwide, up roughly 25% from the year-ago quarter’s 103.95 million. Looking to the third quarter, the company projects it will add 5 million new subscribers, with 650,000 expected in the U.S. and 4.35 million internationally.
Investors need to pay close attention to total subscriber growth going forward, especially with streaming platforms expected from both Apple (AAPL - Free Report) and Disney (DIS - Free Report) due out at some point in 2019. Netflix’s U.S. market will also become increasingly important because it’s insanely saturated, and its forecast is very broad.
The company closed the quarter with 57.38 million domestic users and Netflix’s long-term view is that its U.S. subscriber base can grow to between 60 to 90 million. Therefore, on the low-end, Netflix has practically no room to grow at home. Meanwhile, on the high-end, it could add 30 million more users in the U.S. alone.
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Should Investors Be Scared About Netflix's Huge Subscriber Miss?
Shares of Netflix (NFLX - Free Report) plummeted after-hours Monday and sunk again Tuesday morning following the streaming giant’s massive second-quarter subscriber miss. But is there truly cause for concern?
The Numbers At A Glance
Netflix added 5.2 million new subscribers in the second quarter to bring its global total to just over 130 million. Investors most likely would have been happy had Netflix projected 4.2 million. Instead, the streaming TV power estimated, based on its own internal forecast, that it would add 6.2 million subscribers worldwide.
The company added 700,000 users in the U.S., which fell well short of its 1.2 million estimate and helped demonstrate just how saturated its domestic market has become. Meanwhile, Netflix added 4.5 million international subscribers. Netflix had called for 5 million new subscribers outside of the U.S.—where the company is supposed to have more room to grow.
Diving Deeper
Netflix fell way short of its own expectations, which is hardly a good sign since management should have a strong grasp on its own growth trajectory. Meanwhile, more than top and bottom line expansion, subscriber growth is vital to Netflix since it is really the only way for it to grow, aside from upping its price.
The company had topped its own subscriber forecasts in seven out of the previous nine periods, including beats in the trailing four quarters. Clearly, Netflix has a solid track record of coming in above its subscriber growth estimates. Maybe more importantly, however, is that Netflix had crushed its forecasts recently.
Netflix added 7.4 million new users in Q1, beating its estimate by 1 million. The company topped its Q4 2017 forecast by 2 million, its Q3 projection by 900,000, and its Q2 estimate by 2 million. The last time Netflix fell short of its subscriber forecast was in the first quarter of last year when it added 5 million new users when it called for 5.2 million.
Furthermore, 5.2 million new users marked flat year-over-year growth. The last time Netflix didn’t add more users than it did in the prior-year period was the first quarter of 2017 when it grabbed 5 million new users compared to the first quarter of 2016’s 6.7 million. So clearly there is nothing that novel here, it is just that this time around the miss is bigger than it has been in the recent past and follows a streak of impressive beats—which led to a massive gain in share price.
Why?
Netflix noted in its second quarter letter to shareholders that the quarterly guidance it provides is its “actual internal forecast at the time we report and we strive for accuracy, meaning in some quarters we will be high and other quarters low relative to our guidance.” The company also talked somewhat briefly about why it fell short of subscriber growth on its conference call. “After four consecutive questions of under-forecasting the business, we over-forecasted the business,” CFO David Wells said on the call.
Furthermore, the company pushed back on an analyst who suggested that Netflix’s “well-publicized, essentially global” price hike might have played a role in the big miss. The firm’s CFO noted that Netflix rolled out various price increases in many markets around the world in 2017, and said that he didn’t think higher costs contributed to Q2’s miss.
“We've seen this movie of Q2 shortfall before about two years ago in 2016,” CEO and founder Reed Hastings said. “We never did find the explanation to that, other than there's some lumpiness in the business and continue to perform after that.”
Looking Ahead
Netflix’s executives did not have a great answer for why the company fell 1 million subscribers short, which is part of the reason for Tuesday’s continued dip. Meanwhile, the streaming TV market has become increasingly crowded, especially in the U.S., with Amazon (AMZN - Free Report) , Hulu, and others expanding.
Netflix closed the quarter with 130.14 million subscribers worldwide, up roughly 25% from the year-ago quarter’s 103.95 million. Looking to the third quarter, the company projects it will add 5 million new subscribers, with 650,000 expected in the U.S. and 4.35 million internationally.
Investors need to pay close attention to total subscriber growth going forward, especially with streaming platforms expected from both Apple (AAPL - Free Report) and Disney (DIS - Free Report) due out at some point in 2019. Netflix’s U.S. market will also become increasingly important because it’s insanely saturated, and its forecast is very broad.
The company closed the quarter with 57.38 million domestic users and Netflix’s long-term view is that its U.S. subscriber base can grow to between 60 to 90 million. Therefore, on the low-end, Netflix has practically no room to grow at home. Meanwhile, on the high-end, it could add 30 million more users in the U.S. alone.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>