U.S. markets closed

Netflix's 'horrendous' subscriber numbers could be bad sign

JP Mangalindan
Chief Tech Correspondent

Netflix’s (NFLX) disappointing second-quarter earnings aren’t simply a blip, one analyst says, but a sign that Netflix’s four consecutive quarters of stellar growth could be coming to an end.

The streaming giant on Monday afternoon reported an addition of 5.14 million new subscribers worldwide, which was lower than analysts’ expectations of 6.27 million. The news sent Netflix’s stock down more than 13% in after-hours trading on Monday, and the stock was still down nearly 6% on Tuesday afternoon.

‘They are approaching market saturation’

Netflix’s subscriber miss comes as it continues spending big on content — $8 billion in 2018 compared to just $6 billion last year — and enlisting stars like Shonda Rhimes and even the Obamas to produce shows. The streaming giant is also spending more on marketing.

They spent twice as much on marketing in the U.S. ($227 million compared to $113 million a year ago) and saw a 37% decline in subscriber growth (to 670,000),” points out Michael Pachter, an analyst with Wedbush Securities. “That’s horrendous, and they expect to spend a similar amount in Q3 and to deliver a similar number of domestic subscriber additions. I think that means that they are approaching market saturation more rapidly than many had anticipated.”

Two firms, Credit Suisse and UBS, slashed their price targets from $500 to $470 and $425 to $360, respectively.

Douglas Mitchelson, a Credit Suisse analyst, concedes Netflix’s subscriber growth over the previous four consecutive quarters is likely unsustainable. As a result of Netflix’s second-quarter subscriber growth miss, Mitchelson lowered his net additions for 2018 from 29.2 million to 26 million. Still, he was more optimistic than Pachter.

“While this miss is disappointing, Netflix’s pace of growth could not accelerate at this scale much longer,” Mitchelson wrote in a report published on Tuesday. “We would suggest any pullback is an opportunity, given Netflix’s clear leadership in the fast-growing global streaming market.”

‘Netflix is ‘leading the way’

Michael Olson, a senior research analyst for Piper Jaffray, estimates that Netflix has a 60% market share of U.S. households with internet. That’s despite growing competition from rivals including Hulu and Amazon Prime, with Disney (DIS) launching a streaming service and AT&T (T) also reportedly exploring a service of its own.

Netflix is the leader in a category that contains massive multi-year growth potential,” Olson wrote. “There will be increasing competition and unforeseen hurdles, but we think Netflix has reached ‘escape velocity.’ As the consumer content dollar shifts from traditional TV to internet delivery, we believe the market will support multiple players, with Netflix leading the way.”

For his part, Netflix CEO Reed Hastings did characterize the subscriber miss as a temporary blip.

“We’ve seen this movie of Q2 [subscriber net adds] shortfall before, about two years ago in 2016 — and we never did find the explanation to that, other than there’s some lumpiness in the business,” CEO Reed Hastings said, as Variety reported. He noted that Netflix “continued to perform after that.”

The path forward for Netflix, however, will unequivocally be fraught with more competitive challenges.

JP Mangalindan is the Chief Tech Correspondent for Yahoo Finance covering the intersection of tech and business. Email story tips and musings to jpm@oath.com. Follow him on Twitter or Facebook.

More from JP: