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Netflix (NFLX) Q2 Subscriber Figures Were Alarmingly Low

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Netflix (NFLX - Free Report) saw its stock price climb over 1% during regular trading hours Monday in a sign that investors were expecting strong Q2 results from the streaming TV giant. But shares of NFLX plummeted after Netflix failed to meet its own subscriber growth estimates by a wide margin in an announcement that is truly worrisome.

Netflix said that it added 5.2 million new members in the second quarter to bring its total to just over 130 million worldwide. That sounds like impressive growth, but it fell one million subscribers short of Netflix’s own 6.2 million forecast.

The streaming company added 700,000 new 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 new international subscribers. This also marked a substantial miss since the company was expecting to expand its international user base by 5 million in Q2.

Netflix fell well short of its own expectations, which is never a good sign since management should have a very precise grasp of its growth trajectory. Furthermore, subscriber growth is paramount since it is one of the only ways for the company to grow both its top and bottom line, aside from raising its prices.

The company posted revenues of $3.91 billion, which fell short of our Zacks Consensus Estimates of $3.94 billion. Meanwhile, Netflix reported adjusted earnings of $0.85 per share, beating our estimate that called for earnings of $0.79 per share. This marked an insane jump from the $0.15 per share Netflix posted in the prior-year period.

Shares of Netflix had skyrocket nearly 150% over the last year on the back of subscriber growth and the continued expansion of streaming and internet-based TV in general. The company added 7.41 million new members in the first quarter, which marked a 50% jump from the year-ago period and topped the company’s forecast of 6.35 million.

Looking ahead, Netflix projects it will add 5 million new users in the third quarter, with 650,000 expected in the U.S. and 4.35 million internationally. The company closed the quarter with 57.38 million users in the U.S. And investors should note that the company is still pretty uncertain about how many more domestic users it can grab since it last said it can grow its U.S. subscriber base to between 60 to 90 million, based upon its trajectory to date and the continued growth of internet entertainment. Therefore, on the low-end Netflix has practically no room to grow, while on the high side it could add 30 million more users in the U.S. alone—a very scary gap.

Investors were clearly disappointed in Netflix Monday, with shares down over 14% after-hours. And they have every right to be a little nervous since the company missed its subscriber forecast by one million this quarter after topping it by nearly the same amount last quarter. This kind of fluctuation is not a great sign for the company going forward. 

Netflix might be the unquestioned streaming king at the moment, but its subscriber growth is paramount as it competes against Amazon (AMZN - Free Report) Prime and Hulu, and soon enough Apple (AAPL - Free Report) and Disney (DIS - Free Report) .

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