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Has Netflix Reached its Peak?

Posted on Wednesday, Jul 18th 2018

After four consecutive quarters of surprising the market with stellar results, Netflix (Nasdaq: NFLX) delivered rather weak results recently. The market was disappointed with its lack luster growth, sending the stock tumbling 13% in the after-hours trading session.

Netflix’s Financials

Netflix’s Q2 revenues grew 40% over the year to $3.9 billion, marginally short of the Street’s forecast of $3.94 billion for the quarter. EPS of $0.88 was better than the market’s projections of $0.79 for the quarter.

During the quarter, Netflix added 670,000 domestic subscribers and 4.47 million international subscribers. The market was looking for an addition of 1.2 million domestic subscribers and 5.04 million international subscribers. Netflix did not even manage to meet its own forecast of 1.2 million domestic and 5 million international subscribers.

For the current quarter, Netflix expects revenues of $3.99 billion, short of the market’s forecast of $4.13 billion for the quarter. It expects to add 650,000 domestic subscribers compared with the Street’s expectations of 953,000 subscribers. International subscriber forecast addition of 4.35 million was also short of the market’s projected addition of 5.095 million for the quarter. Netflix expects to end the quarter with $0.68 EPS compared with the Street’s forecast of $0.71 per share.

Netflix’s Growth Concerns

For Netflix, it has always been about subscriber growth. And its recent quarterly results failed to deliver on those numbers. The company mentioned that it was hurt by unfavorable currency movements during the quarter and did not give a reasonable expectation for the miss on subscribers. It claims that it had seen a similar shortfall in the subscriber growth two years ago, and believes that the recent shortfall could be seasonal as well. But if its forecast for the current quarter is to be believed, then the flat sequential growth could suggest something bigger than seasonality.

The market is speculating if the miss on subscribers is driven by its earlier decision to hike monthly subscription costs. Netflix needs the price hike to pay for its ballooning content costs. Over the last 12 months, it has spent $10.1 billion on content development and acquisition. That number is four and a half times the amount that HBO spent last year on the development of content for its network. The numbers don’t get better in the current year. Netflix plans to spend $8 billion in fiscal 2018 on programming and an additional $2 billion on marketing.

The spend is needed to combat rising competition. Companies like Amazon and Apple are also putting in money into content creation. Amazon is working on adding more regional content in India as it expands its Prime video service around the world. Apple is investing in original programming by signing up big names like Oprah Winfrey. Among regional players, Netflix sees rising competition from ProSiebenSat 1 Media in Germany and on-demand service Salto in France. The only way it can manage to surpass this competition is by offering a library that is more attractive than its competitors’. It needs to figure out ways to attract more subscribers to help pay for the content.

Its stock is trading at $343.89 with a market capitalization of $174.1 billion. It had touched a life high of $423.21 earlier last month. It has been climbing from the 52-week low of $160.02 that it was trading at in August last year.

I do believe that Netflix’s stock had ran up way too high and the decline that we are currently seeing is a necessary market correction. At present, Netflix’s content library is unbeatable. With the investment in content that the company continues to make, this library will only grow steadily. It does need to address and figure out how to counter the regional content strategies that its competitors are offering, but I have faith in Netflix. It has navigated every curve in its business thus far, and I believe it will navigate this new one as well. So, in my opinion, no, Netflix has NOT reached its peak.

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