Netflix (NASDAQ:NFLX) delivers earnings beat, but shares tumble on Q2 subscriber decline

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Updated: 19 July 2019
  • Media services provider posts $0.60EPS and $4.92bn revenue versus $0.56 and $4.93bn consensus
  • US paid subscribers fall 126,000 versus +352,000 forecast
  • International paid subscribers up 2.83 million, short of 4.81 million estimate
  • Shares marked 11% lower on Thursday

Netflix (NASDAQ:NFLX) shares tumbled into negative territory on Thursday after the streaming giant lost subscribers in the United States and failed to live up to the consensus on adding new paying customers around the world as recent price rises and increased competition crimped growth.

Netflix did manage to impress with its financial results as $0.60 EPS for the three-month period ending 30th June was 4 cents ahead of the Wall Street estimates but was still 30% down on Q2 2018. Group revenues of $4.923bn also advanced 26% to fall in line with forecasts.

While those numbers are healthy, investors may be concerned by the 126,000 drop off in US subscribers, which is the first decline since 2011. Netflix also only managed to bring in 2.83 million new global customers, well short of the 4.8 million predicted by analysts, who believe higher prices and a lukewarm reception to original content are to blame.

Despite the setback, Netflix is confident that Q3 will be stronger as hugely popular sci-fi franchise ‘Stranger Things’ recently returned for a third season, while new series of the ‘The Crown’ and ‘Orange is the New Black’ are also slated for release. The company expects to add 7 million global paid subscribers during the period and to deliver around $5.25bn in revenue.

“I think our position is excellent,” Netflix CEO Reed Hastings said late on Wednesday. “We're building amazing capacity for content. Our products have never been in better shape. Our rate of investment is extremely high. So if investors believe in Internet television, which I think is an easy one to get there, then our position in that market is very strong.”

Analysts remain particularly bullish on Netflix as the Los-Gatos headquartered company has 27 Buy ratings compared to nine at Hold and two at Sell. The average price target of $412.42 is also above the current price of $362.44. BMO Capital Markets’ Daniel Salmon reiterated his ‘outperform’ rating but did raise some concerns.

He said. “The 2Q subscriber shortfall will fuel the debate about US pricing power and the role of new content to drive net adds. And the negative QoQ US decline combined with Disney+'s approaching US launch, make this more than just the usual once-a-year debate after a quarterly miss.”

A number of entertainment giants are set to enter the streaming space during the next year with the Disney + service chief among them, but Salmon believes Disney (NYSE:DIS), along with Netflix and Amazon (NASDAQ:AMZN), should be viewed as a “collective investment in the global streaming race.” He also expects Netflix’s slump to be a “short-term wobble.”

Netflix shares had soared 35% in 2019 prior to Wednesday’s report but the underwhelming showing sent them in the other direction immediately after. Shares were 11.05% down in Thursday’s premarket and were set to open at $332.40, reducing the year-to-date advance to 20.45%.