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Netflix Plunges After Slowdown Threatens Highflier Status

Lucas Shaw
An Apple Inc. laptop displays the home screen for the Netflix Inc. original series 'The Mechanism' next to signage on a television monitor in an arranged photograph taken in Sao Paulo, Brazil, on Wednesday, March 28, 2018. Photographer: Rodrigo Capote/Bloomberg

Netflix Inc. plummeted in late trading after posting disappointing subscriber growth in the latest quarter, threatening the run of one of Wall Street’s hottest stocks.

Netflix added 5.2 million users in the second quarter, about a million fewer than the company predicted. Its outlook for the current quarter also reflected a deceleration: The world’s largest paid online TV network expects to add 5 million customers, a slower pace than a year earlier.

The stock fell as much as 15 percent to $342 in extended trading. It had more than doubled this year through Monday’s close.

Investors and analysts now have the job of weighing whether the slowdown is a blip or a longer-term problem. Netflix’s stock has surged to record highs in recent months because investors believe the company will add tens of millions of customers around the world for years to come.

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One reason for the shortfall may have been a lack of content. Netflix released a thin slate of shows in the quarter, relative to its typical output. It didn’t add new seasons of its biggest hits, such as “Stranger Things,” nor did a new show become a phenomenon. Ever since Netflix released “House of Cards,” the company has credited new seasons of original series with luring new customers.

Netfllix did release a new season of “13 Reasons Why” and the Marvel series “Luke Cage,” as well as a breakout standup comedy special in Hannah Gadsby’s “Nanette.”

World Cup Woes?

Potential new customers may have also been distracted by the World Cup, a quadrennial soccer tournament that is among the most-watched TV events in the world. Netflix, based in Los Gatos, California, didn’t specify why it fell short last quarter, beyond citing the difficulty of forecasting growth in 190 countries around the world.

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Investors value Netflix at a far higher level than other media companies of similar size because of that potential for future growth. Its market valuation surpassed that of Walt Disney Co. this year, despite reporting less than a quarter of the revenue.

Second-quarter revenue also came in short of projections. Netflix posted $3.91 billion, compared with an average estimate of $3.94 billion. But the company hit a milestone: International customers accounted for a bigger piece of sales than domestic users.

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Once primarily a service for English speakers, Netflix has ramped up its investment in shows filmed in other languages. The company debuted its first Danish and first Indian dramas in the quarter, and it plans to release a new foreign-language program at least once a week next year.

Profit was a bright spot in the latest quarter, but not by enough to reassure investors. Earnings amounted to 85 cents a share, topping the 79-cent estimate of analysts.

“We had a strong but not stellar quarter,’’ the company wrote in a letter to shareholders.

Spending Spree

Producing and promoting a library of shows for a global audience has come at a high cost. Netflix has borrowed money repeatedly to pay for its programming, and expects to spend between $3 billion and $4 billion more in cash than it will generate in 2018. Marketing expenses surpassed $500 million in the quarter, nearly double the amount spent a year ago.

Netflix’s rise has pushed other technology and entertainment companies to invest more in online video services. Disney is selling an internet version of its sports network ESPN and plans to introduce a general entertainment video service next year. Apple, meanwhile, is spending more than $1 billion on original programming.

Netflix said Monday that it expects more competition, but dismissed any potential negative impact on it business. “Our strategy is to simply keep improving, as we’ve been doing every year,’’ the company said.

Rob Arnott, head of fund advisory firm Research Affiliates, said on Bloomberg Television that Netflix’s drop will likely have a broad impact on indexes. It had been the second-biggest gainer on the S&P 500 so far this year.

“There’s a distinct risk of a ripple effect,” Arnott said.

Updates shares in third paragraph.

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