Investors fled Netflix NFLX stock after the firm reported potentially worrisome Q2 subscriber figures on Wednesday. Now many on Wall Street are left to wonder if the major user miss is a hiccup for an impressive growth stock, or the start of much tougher times.
Quick Q2 Overview
Netflix posted adjusted Q2 earnings of $0.60 per share that topped our Zacks Consensus Estimate. But this marked a significant fall from the prior-year period’s $0.85 a share.
At the top of the income statement, NFLX fell just slightly short of Wall Street estimates at $4.92 billion. Netflix’s sales did jump 26% above Q2 2018 and topped Q1’s 22% top-line expansion. Second-quarter revenue growth also nearly matched Q4 2018 and came on top of the year-ago period’s 40% jump.
Netflix added 2.7 million paid memberships during the second quarter. This fell far below its own 5 million forecast and Wall Street’s 5.5 million estimate. More specifically, the Los Gatos, California-based firm noted that it had roughly 130,000 fewer U.S. subscribers at the end of Q2 than it did in the first quarter. This marked the streaming firm’s first quarter-to-quarter subscriber decline in the U.S. since 2011.
Investors should remember that this is not the only time NFLX has fallen well short of its own subscriber estimates, it is just the largest miss over the last four years. The company added 5.5 million users in Q2 2018, when it projected it would bring in 6.1 million. Netflix also fell short by roughly 1 million in Q1 2017 and Q2 2016. Yet, the recent subscriber shortfall followed three straight periods of impressive beats.
Netflix executives blamed part of the subscriber miss on its new content schedule. Looking ahead, the company expects to add 7 million paid users in the third quarter to end the period with 158.6 million global subscribers.
Outlook & Competition
Netflix is currently the largest streaming platform around the world, with 60.1 million U.S. users and 91.5 million international subscribers, up roughly 22% year over year. “In prior quarters with over-forecasts, we’ve found that the underlying long-term growth was not affected and staying focused on the fundamentals of our business served us well,” Netflix wrote.
As it stands, Netflix is much larger than Amazon AMZN Prime, which reportedly claims over 100 million users, while Hulu last reported 28 million users. But times are changing quickly for the streaming TV industry. Disney+ DIS will debut in November, with Apple AAPL set to launch its own stand-alone streaming service this fall. Meanwhile, NBCUniversal CMCSA and AT&T T are set to debut offerings early next year.
Netflix has lost two of its most-watched TV shows in the U.S., The Office and Friends, recently. The Office is currently Netflix’s No. 1 show, according to Nielsen data. And library programming, which includes TV reruns licensed from other studios, accounted for 72% of total viewing minutes last year.
Netflix has, of course, prepared for entertainment firms to start their own streaming services and pull their content. This is precisely why Netflix continues to spend billions of dollars on original TV shows and movies.
Still, NFLX’s spending has worried many as the company continues to burn cash. In fact, free cash flow was -$594 million in the quarter, with the company expecting -$3.5 billion for fiscal 2019, with a slight improvement expected in 2020. “In the meantime, our plan is still to use high yield debt to fund our content investments as we did in April.”
CEO Reed Hastings remains sanguine as his company prepares to battle some of the biggest companies in entertainment. And Netflix’s full-year fiscal 2019 earnings are projected to jump 21.6% on roughly 28% higher revenue.
Peeking ahead, NFLX’s 2020 EPS figure is expected to soar 76% higher than our current-year estimate, with sales projected to climb 24% above our 2019 estimate to reach $25.1 billion. Yet, user expansion will drive the subscription-based firm for years to come, since it once again shot down any ideas that it might adopt an advertising model.
The streaming power is likely correct not to change its business model. Netflix’s standard plan currently costs $12.99 per month, with its four-screen premium offering at $15.99. And these costs could rise or fluctuate over the next several years in what could turn into pricing wars between companies, with Disney+ set to start at $6.99 per month.
Netflix stock has fallen 13% over the last 12 months and hovered at $316.23 a share through late afternoon trading Friday—down another 3%. Despite its recent downturn, Netflix is trading at 68.8X forward 12-month Zacks earnings estimates at the moment, which represents a massive premium compared to its industry’s 19.5X average and fellow growth-focused Amazon’s 60X.
In the end, it might be best to wait until the post-Q2 bleeding stops. It is worth keeping an eye on Netflix though, which will likely rise again as the streaming age is really just heating up.
For instance, the company said that it still only grabs about 10% of consumers’ television time and even less mobile screen time in its most saturated market, the U.S. Netflix thinks this gives it plenty of room to grow. Netflix is currently a Zacks Rank #3 (Hold), which could change as more analysts update their estimates following earnings.
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