Netflix shares drop after subs target missed

Netflix’s share price plummeted more than 14% on Monday after the streamer missed its overall subscriber growth target for the second quarter of 2018 by 1.05 million.

Reed Hastings

After an exceptionally strong Q1, when the global streamer added 7.41 million subscribers in total compared with 4.95 million at the same stage in 2017, Netflix added 5.15 million subscribers in Q2 against its target of 6.2 million.

Share prices for Netflix dropped from around US$400 to just under US$344 in after-hours trade as investors absorbed the financial results.

Overall, the SVoD heavyweight has 130.14 million subscribers worldwide, but the slowing down of growth will have given rival streamers like Amazon and Apple encouragement as they look to claw back the ground that Reed Hastings’ company has made in the last seven months.

In a letter to shareholders, CEO Hastings acknowledged the lack of subscriber growth against Q1 predictions, saying the company had a “strong but not stellar” quarter, but he also stressed that revenues had strengthened compared with last year’s Q2 results.

Netflix’s streaming revenue was US$3.8bn in Q2 2018, up 43% on last year’s results, and total revenues were up 40% at US$3.9bn, in line with the company’s forecasts. Hastings also pointed to the success the SVoD firm was having in terms of its content, highlighting the record 112 Emmy nominations it received last week and its ramping up of international content to cater for its different markets.

“As a reminder, the quarterly guidance we provide is our 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,” Hastings wrote, accounting for the subscriber growth slowdown.

“Our broad slate of programming in Q2 highlights the diversity of programming we are providing. This serves as another data point that our international originals can be important to specific countries and regions and also play well outside of their home markets.”

Hastings added that, along with YouTube, Netflix is the “leading global entertainment service,” but recognised the competition his firm would face from the other streamers and traditional broadcasters making strong forays into the OTT space.

In addition to having received US government approval to complete its acquisition of substantial assets from 21st Century Fox, which will deepen its content library considerably, Disney is prepping its international streaming service to rival the likes of Netflix. Last year, the Mouse House decided to pull its movies from Netflix and end its distribution agreement with the company in preparation for its own streamer launch.

Hastings said Netflix “anticipates more competition” and that the likes of Apple, Amazon, Disney and HBO had “unique content” and “were striving to find the best creators from around the world to entertain viewers.” However, he added that there was space for all of them to co-exist.

Commenting on the results, media and tech analyst Paolo Pescatore said the industry should “not forget that Netflix is still the first truly global pay TV service.”

He added: “This latest quarter may be a slight falter for Netflix, but it still sets the benchmark for its rivals. It underlines my belief that Netflix needs subscribers and it needs them fast. It is still growing, but not quickly enough in light of its growing costs.

“Typically, this is always a challenging quarter due to seasonality. And more so this quarter given the success of key global events such as the World Cup in driving fans to tune into live TV. This might have a further negative impact on its Q3 results.”