Wall Street less than happy after Netflix undershoots its own subscriber growth target

  • Netflix’s underwhelming subscriber report for Q2 shocked investors
  • Company stock fell by 13% almost immediately following the news
  • CEO Reed Hastings expressed positive outlook despite rising rivals

Person holding a remote against a TV with Netflix written on screen

125 million subscribers worldwide. Isn’t that more than enough for a video streaming platform to be considered successful?

Well, not when you are running an ambitious company such as Netflix, and especially not when you severely underdeliver on your subscriber growth forecast and leave your investors feeling confused and with a bitter taste in their mouths.

On Monday, Netflix told the world that 670,000 more people in the US are now subscribed to their on-demand video service.

While this may seem like a lot, it’s only half of the 1.2 million subscribers that analysts expected for Q2 of 2018. The same could be said about overseas clients—only 4.5 million subscribers, compared to a forecast of 5.1 million.

Trouble in Wall Street paradise

 

This latest report is not the only time Netflix has failed to deliver on expectations. In fact, the streaming giant has erroneously predicted its subscription growth a total of 3 times over the past 10 quarters. This time, however, they did so by a long shot.

The company immediately rushed to do damage control, sending a letter to shareholders and reassuring them that the total number of subscribers for this year is much higher than in 2017 for the same period. Netflix’s chief financial officer David Wells wrote that their subscription projections would be met by the end of the fiscal year.

Netflix also warned investors that they have recalibrated their Q3 subscriber growth to about 5 million, once again failing to meet Wall Street’s expectations of 6.3 million. Finally, executives expressed their confidence that the up and coming shows on the platform will help it double its current subscriber count in the years to come.

But it was all too little, too late.

The company’s underwhelming report understandably made many investors upset, with some analysts even describing Netflix’s Q2 results as a “near-term gut punch”. As a result, company stock plummeted by 13% in after-hours trading.

Let’s take a moment to illustrate just how brutal this price change was for all parties involved. In pre-earnings, Netflix shares enjoyed a 109% price increase and was the second-best performer on the S&P 500 index.

However, once the price fell from $400.48 to $343.60, the company lost a staggering $24.2 billion in market capitalisation in a single day!

The video content provider also came just below expectations on revenue, reporting earnings of $3.91 billion versus estimates of $3.94 billion and earnings per share of 85 cents.

Competing in an oversaturated market

 

It’s no secret that, until recently, Netflix had no direct competition to speak of. So when analysts asked executives how they explain the lower subscription count, they were quick to point at their erroneous calculations.

But is this miscalculation the sole reason for the disheartening amount of new subscribers, or is the company losing its momentum on the market? After all, Disney is already exploring its own video content subscription model, and HBO is continuously refining its strategy as it prepares to be acquired by AT&T.

And then there is Apple and Amazon, which are also very eager to fight for the home viewer’s attention. Apple is expected to invest $4.2 billion in original video and content by 2022, while the popular voice assistant manufacturer is looking to almost double its budget on original content from $4.5 billion to $8.3 billion.

Each of those companies has the resources and the marketing budget to dethrone Netflix from its current number 1 spot should it make another misstep.

Competition, however, is not the only roadblock that Netflix has to overcome—it’s the consumers themselves. For instance, many analysts believe that the company is close to reaching a subscription cap where all the people who would be interested in paying for on-demand streaming services would have done so already.

Where does Netflix plan to go from here?

 

In anticipation of rising competition, the company is expected to invest $12 billion in content until the end of the year, focusing on expanding its reach to other foreign markets. For example, earlier this month Netflix launched its first Bollywood original series, called Sacred Games, which became an instant hit in India.

On the Danish front, it released The Rain, a thriller that also gained a lot of traction. Of course, the streaming platform has a lot in store for the US viewership in the form of documentaries, comedy specials, documentaries, and more. This time around, company executives even managed to sign a deal with Barack and Michelle Obama to produce shows and documentaries revolving around their rich life experiences.

Whether CEO Reed Hastings’ comment that “the fundamentals have never been stronger” reflects the reality or not for Netflix it will come down to how accurate the next report is, and on whether the company will be able to stay on top of the competition. Until then, investors will likely keep their wallets inside their pockets, just in case.