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Netflix Misses on Subscriber Growth and Investors Pummel the Shares

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Shares of Netflix (NFLX - Free Report) rallied sank over 13% to $345 in after-market trading on Monday after the company reported earnings of $0.85/share, beating analyst expectations of $0.79/share by 7%

Revenues came in at $3.91B for the second quarter. The Zacks Consensus estimate had been $3.94B.

The shares had previously rallied slightly over 100% in 2018, easily the most successful big-cap tech stock in the U.S.

As has been the case lately with Netflix, the biggest story was subscriber growth. After beating analyst estimates in Q1 when they added 7.4 million subscribers - topping the consensus by almost 900,000 - NFLX was expected to add 6.2 million more in Q2, but actually added only 5.1 million . As expected, the majority of subscriber growth came from outside the U.S. with 670,000 new domestic subscribers and 4.5M internationally.

Recognizing that with 57 million U.S. subscribers already and approaching saturation, Netflix has been concentrating recently on increasing the international appeal of its programming.

Costs were in focus as well as the company continues to spend heavily on original content as a driver for subscriber growth.

Operating on a net negative cash-flow basis due to heavy sending on original content, Netflix depends heavily on the debt markets to fund operations and in Q2, they raised an additional $1.9 billion in anticipation of even heavier content spending in the second half of 2018.

The company’s guidance for Q3 is slightly below pervious estimates. They anticipate earning $0.68/share on $3.99B in sales, versus Zacks Consensus estimates of $0.71/share on $4.14B in sales. They also adjusted their estimate for subscriber growth lower to 5 million new subscribers in Q3. Analysts had been looking for Q3 subscriber estimates closer to 6 million.

In his letter to investors, CEO Reed Hastings mentioned increased competition from YouTube, anticipated competition from HBO and Disney (DIS - Free Report)   in the streaming space and noted the significant investments of Amazon (AMZN - Free Report) and Apple (AAPL - Free Report) in internet entertainment. He also mentioned the potential effects of the AT&T/Time Warner (T - Free Report) deal as well as the impending Fox (FOXA - Free Report) merger with either Disney or Comcast (CMCSA - Free Report) as potential headwinds.

Prior to the report, Netflix had been trading at a 12 month forward P/E ratio of 102X and many investors considered the shares to be “priced for perfection.” Today’s numbers - while not a disaster - were definitely not perfect, and the market seems to be making Netflix pay for it.

The landscape has definitely gotten more difficult for this Cinderella story as competition heats up in the streaming entertainment space.

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