Netflix’s Black Mirror – WSJ


NFLX -0.97%

investors don’t need 13 reasons to be nervous. One is more than enough.

The video-streaming company reported disappointing subscriber growth for the second quarter Wednesday afternoon. Netflix added just 2.7 million new paid subscribers during the quarter—46% less than the 5 million it projected three months ago. Revenue was in line with forecasts at $4.9 billion, up 26% year over year. Operating income jumped 53% on the same basis to $706 million, thanks in part to a shift in marketing spending into the second half of the year.

But Netflix investors tend to focus on subscribers, and neither the current quarter’s growth nor the company’s forecast for the third quarter presented a compelling picture. Netflix said it expects to add 7 million new paid subscribers for the current period, below the 7.7 million expected by Wall Street. On the bright side, the current quarter includes new seasons of two of the company’s most popular original programs in “Stranger Things” and “Orange is the New Black.” Netflix shares fell 12% after hours following the report.

Investors have seen this show before and reruns could follow. Netflix is the undisputed leader in streaming media but over 45% of its users are in North America. In the U.S., Netflix already captures 88% of streaming-media users, according to eMarketer.

The company reported in a letter to shareholders that U.S. paid membership actually declined slightly in the second quarter versus the prior period. The company’s larger growth opportunity lies abroad, including in countries where discretionary spending is more modest. Recent price increases in places such as Latin America likely won’t help. Management noted its subscriber miss in the quarter was higher in countries where prices increased.

Given light subscriber growth in the quarter, Netflix needs to get more revenue from its users to slow the company’s increasing cash burn and heavy borrowings. But price increases, much less subscriber growth, may become challenging if Netflix continues to lose top shows like “Friends” and “The Office” without continuing to produce original content that can replace those losses.

This presents something of a Catch-22: Netflix needs to fund new blockbusters to grow users but also needs increased user revenue to roll the tape. Meanwhile, the company quashed speculation Wednesday that it was considering an ad-supported tier—effectively taking another potential revenue-driver off the table.

Netflix stock was up 37% year to date prior to Wednesday’s release. At more than 77 times forward earnings, it continues to trade at a massive premium to Nasdaq internet peers, which fetch 33 times, and even more of one to incoming streaming competitor

Walt Disney

Co. at 22 times.

Netflix’s premium was earned through its disruption of an industry. To avoid a correction, then, Netflix must continue to stand apart.

While there is little risk to Netflix becoming an also-ran any time soon given its huge head start on the competition, it will really start losing friends if growth falters or if it has to dig too deep to keep the hits coming.

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