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Netflix stock whipsaws after weak 2Q guidance

Shares of streaming giant Netflix (NFLX) fell after the company delivered disappointing guidance for the fiscal second quarter, overshadowing strong subscriber additions for the first three months of the year.

The Los Gatos, California-based company delivered diluted earnings of 76 per share on revenue of $4.52 billion for the fiscal first quarter of 2019. Consensus estimates were for the company to deliver adjusted earnings of 76 cents per share, or 58 cents on an un-adjusted basis, and revenue of $4.5 billion, according to Bloomberg-compiled estimates.

Netflix added 9.6 million total new subscribers in the first quarter of the year, a 16% increase from the year prior and the highest quarterly paid net adds in company history. This included 1.74 million new domestic subscribers and 7.86 million international subscribers.

Consensus expectations had been for 8.94 million global net additions in the first quarter. Last quarter, the company added 8.8 million worldwide paying members.

However, Netflix guided toward a deceleration in the pace of new subscriber additions for the fiscal second quarter, which historically has been a seasonally weaker quarter in terms of bringing on new paid memberships.

The streaming giant said it sees second-quarter paid net streaming additions of 5 million, short of Wall Street’s expectations for 6.09 million new subscribers. This represents an 8% decline from additions in the year prior.

Netflix in January announced its largest price hike in company history for U.S. subscriptions, which many analysts anticipated would soften new subscriber growth into the second quarter. The company is also working through a series of price increases in Brazil, Mexico and parts of Europe, it said in its shareholder letter.

Shares of Netflix fell as much as 9.3% to $326.00 each shortly following results before paring losses.

PARIS, FRANCE - FEBRUARY 13: In this photo illustration, the Netflix logo is displayed on the screen of a television. Netflix has more than 5 million subscribers in France, 4 and a half years after its arrival in France in September 2014. (Photo by Chesnot/Getty Images)

Netflix is also continuing to burn through cash in order to fund new content production. Free cash flow in the first quarter was negative $460 million, versus negative $287 million in the year-ago quarter. The company said it expects its free cash flow deficit to come in “modestly higher” than previously expected in 2019 at negative $3.5 billion. Netflix attributed this to higher cash taxes due to corporate structure changes, along with additional infrastructure investments.

However, management reiterated that it expects free cash flow to improve in 2020.

The company’s negative free cash flow has also been coupled with increasing leverage as the company dipped into debt markets to fuel content spending, leading to some concern over the firm’s high debt-load. Netflix ended the first quarter with $10.31 billion in long-term debt on its balance sheet, little changed from $10.36 billion at the end of the fourth quarter.

Netflix telegraphed in its latest letter to shareholders it does not intend to change its “plan to use the high yield market” to finance its cash needs.

Crowded space

Netflix’s latest earnings announcement comes as a host of major companies – including Disney (DIS) and Apple (AAPL) – have put forth details for their own streaming services.

“Both companies are world class consumer brands and we’re excited to compete; the clear beneficiaries will be content creators and consumers who will reap the rewards of many companies vying to provide a great video experience for audiences,” Netflix wrote in its letter to shareholders.

“We don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings,” it added.

Shares of Netflix slid 4.5% last Friday, while Disney shares surged to all-time highs after the latter announced that its new streaming platform Disney+ would be priced at $6.99 per month, or $2.00 less than Netflix’s Basic plan. However, Netflix’s stock rose the day Apple unveiled its streaming video service called Apple TV+.

Other competitors include CBS All Access (CBS), Hulu, Amazon Prime Video and YouTube TV, with other offerings from AT&T and WarnerMedia (T), NBCUniversal and Discovery (DISCA) on the way.

However, competition concerns may be “overdone” said JPMorgan analyst Doug Anmuth, given Netflix’s incumbency and room for multiple major players in streaming.

“We expect Disney+ will likely be the most competitive streaming offering to NFLX, but we still do not view it as a major threat to NFLX subscriber numbers given NFLX’s quality and quantity of content,” Anmuth wrote in a note Monday.

“Importantly, given the strong global secular shift toward streaming, we believe there is room for multiple companies to succeed, and in our view Netflix/Disney+ will not be an either/or decision,” he added.

Streaming service comparison

Likewise, BMO Capital Markets analyst Daniel Salmon said in a note Monday he was “comfortable recommending NFLX, AMZN, and DIS together as we believe all three will be long-term winners in global streaming.”

Other analysts were similarly bullish heading into Netflix’s results. Deutsche Bank analyst Bryan Kraft upgraded shares of Netflix to Buy from Hold in a note published Tuesday and raised the price target on the stock by $40 to $400. He noted that the company has been “winning the battle for talent” with its high-value original content and called the streaming service “more like a platform every day,” instead of a singular app on a phone or desktop.

“This is making Netflix even more of a go-to destination when consumers want to watch something, and it means having Netflix is becoming more of a cultural necessity for people around the world,” Anmuth said.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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