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After Subscriber Growth Disappointment, Investors Weigh Netflix’s Future

·4 min read
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Call it the king of streaming or the cable TV killer. Netflix (NFLX) has grown into one of the planet’s biggest media companies, and when it reports its quarterly earnings data, investors watch with anticipation.

The quarter ending in June was clearly no exception, as traders placed their pre-data-release bets and social media pundits declared their bullish or bearish predictions.

There was a lot at stake this time around. Netflix was a darling of the markets during last year’s COVID-19 pandemic lockdowns, as people sought home-based entertainment. Yet, even with the Delta variant strain spreading, concerns linger that the lockdown love may be starting to fade for Netflix.

So, was the data release a blockbuster, or a bust? Stay tuned for the scoop on what might be Netflix’s crucial earnings release – and the implications for current and prospective investors. (See Netflix stock charts on TipRanks)

Not Swinging for the Fences

In the quarter that ended in March, Netflix added a total of 4 million net new subscribers. That might sound like a lot, but it’s 2 million fewer than the originally expected amount.

Moreover, for the June quarter, Netflix projected that the company would add only 1 million net new subscribers. Plus, the company had offered guidance of $7.3 billion in revenues and $3.16 per share in profits for the June quarter.

Is it possible that Netflix was deliberately low-balling the forward estimates in order to set the company up for an all-around earnings beat?

There’s no way to prove that this is the case, but it’s a strategy that some companies have used in the past. Sometimes, it can be highly effective.

In any case, the expectations are generally lower in 2021 than they were last year. Impressively, Netflix added 36.6 million subscribers in 2020, which increased the total to over 200 million.

That would be a difficult feat to top. Hence, with Netflix reporting its June-quarter earnings after the closing bell on July 20, the expectations were muted. Would the company deliver, or underperform?

Disappointment in a Critical Area

Revenues are crucial, but for streaming services, subscriber growth is the gauge at which that many investors and analysts look.

Unfortunately, for the company’s second fiscal quarter, Netflix served up a huge disappointment in that area. As it turns out, the company reported 1.54 million net new paid subscribers, which is Netflix’s lowest quarterly total so far.

On the other hand, we have to keep the low expectations in mind. 1.54 new subscribers is actually greater than the average analyst forecast of 1.15 million (according to FactSet).

Then again, Netflix added more than 10 million net new subscribers in year-ago quarter, when COVID-19 kept many people indoors.

What about forward guidance in this area? Regarding that, Netflix projected 3.5 million net new paying subscribers for the company’s third fiscal quarter. That’s significantly less than the analysts’ average expected increase of 5.5 million new subscribers (via FactSet).

The Big Prize

Admittedly, there’s more to the story than subscriber growth. After all, those subscribers should translate to revenue growth – or so we should hope, at least.

Interestingly, since Netflix increased its subscription prices, this helped to make up for lackluster subscriber growth during the second quarter.

So, let’s start with the top-line result. Reportedly, Netflix’s quarterly revenues increased 19.4% to $7.34 billion. That’s basically in line with the estimates of $7.32 billion.

Now, we’ll move on to the bottom line. Netflix earned $1.35 billion during the reported quarter, which translates to $2.97 per share. That’s a marked improvement from the $1.59 per share recorded for the year-ago quarter.

However, that figure still missed Wall Street analysts’ expectations of $3.18 per share (provided by FactSet).

Additionally, there’s another metric to watch, according to Netflix co-Chief Executive Reed Hastings. “The big prize is keeping revenue growth at 20%,” Hastings emphasized.

Wall Street Weighs In

According to TipRanks’ analyst rating consensus, NFLX is a Moderate Buy, based on 15 Buy, 5 Hold, and 3 Sell ratings. The average Netflix price target is $598.21, implying 12.65% upside potential.

The Takeaway

Even with low expectations, Netflix didn’t knock it out of the park during the second quarter.

Still, the immediate reaction from the markets was muted, with the after-hours NFLX share price barely moving.

So, there you have it: maybe aiming low was the right move for Netflix to make.

The company won’t likely be able to rely on that tactic in future quarters, though – in this competitive market, even a streaming giant like Netflix will need to excel, if it is to survive.

Disclosure: At the time of publication, David Moadel did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.