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Netflix's 2 Million Subscriber Shortfall Costs It $15 Billion

Netflix's 2 Million Subscriber Shortfall Costs It $15 Billion
Mohamed Ahmed Soliman | Dreamstime.com

By    |   Thursday, 18 July 2019 12:22 PM

Disappointing subscriber numbers for the second quarter shaved $15 billion from Netflix Inc.’s market value as trading opened Thursday.

Netflix shocked investors by reporting a drop in U.S. customers and much slower growth overseas, raising fears that the streaming giant is losing momentum just as competitors prepare to pounce.

The shares (NFLX) plunged as much as 11%, the most in a year, to $323 in New York trading Thursday after Netflix on Wednesday reported the loss of 130,000 customers in the U.S. The company blamed higher prices and a weak slate of TV shows. It signed up 2.8 million subscribers internationally in the period, roughly half what the company predicted.

For comparison, $15 billion is more than the value of about a third of the companies in the S&P 500, including American Airlines Group Inc. and Viacom Inc., Bloomberg explained.

However, Wall Street brokerages stuck to a positive outlook on Netflix, betting that a strong content slate for the rest of 2019 would reverse shock losses in U.S. subscribers in the second quarter that sank its stock price.

Shares in the company fell, as investors worried over an earnings report that showed lower-than-expected global growth and signs of trouble in its U.S. base ahead of the much-awaited launch of Walt Disney Co.’s (DIS) new rival service later this year, Reuters reported.

The company, which on a price-to-earnings basis is by far the most highly valued of the FAANG group of big U.S. tech companies, has quadrupled in value since 2015 but at $321 per share is now down $100 from last year’s peaks.

The April to June period tends to be seasonally weak for Netflix in the United States, where warmer weather and longer days keep people outdoors and away from their screens.

Brokers Cowen & Co calculated Netflix had missed expectations for second-quarter subscriber numbers three times in the last four years.

This year, however, the Los Gatos, California-based company added a batch of aggressive price hikes to the mix and the outright fall in U.S. subscribers was the first in eight years.

“They raised prices in the U.S. by an average of $2 per month, and most subscribers learned about their increase during Q2,” said Wedbush Securities analyst Michael Pachter.

“I think that was a much bigger driver of churn than a dearth of content.”

STILL A BUY

Ten Wall Street brokerages cut their share price targets to reflect Thursday’s fall, but there were no cuts to their ratings on the stock, still seen by a majority of Wall Street firms as a high-potential growth business and a clear “buy”.

While competition is set to heat up with the upcoming launches of Apple Inc’s (AAPL.O) Apple TV and Disney+, several analysts said Netflix’s global reach is likely to give it an edge.

Netflix added just 2.83 million international paid streaming subscribers, compared with Street expectations of 4.8 million, but it now has 151.6 million worldwide, dwarfing its nearest rivals Amazon Prime and HBO.

“By 2025, based on Disney projections, it looks like Netflix will be spending at least five times as much on content as Disney+,” said Pivotal Research Group analyst Jeff Wlodarczak.

“I also think Disney+ is likely to help accelerate consumers away from traditional Pay TV toward OTT (content over an internet connection) which should benefit Netflix.”

The company raised prices in Britain, Switzerland, Greece and Western Europe in the quarter, testing the waters in some of its wealthiest markets at a time when it is still spending massively more than it earns to win the content battle.

The company began the third quarter with the release of its 1980s-set smash-hit “Stranger Things” and will follow it with new seasons of “Orange is the New Black,” and “The Crown” as well as hotly-awaited Martin Scorsese movie “The Irishman”.

“We would note Netflix misses have been followed by strong quarters, and, along those lines, we expect Netflix’s very strong 2H slate will lead to a rebound in sub growth,” Credit Suisse analysts wrote in a client note.

The junk bonds the firm uses to fund its $12.5 billion debt burden fell in value on Thursday. Yields on its Feb 2021 bond rose 16 basis points to 3.34%, according to Refinitiv data, still far off a peak of around 5.1% hit in January when the stock market was falling broadly.

Material from Bloomberg and Reuters has been used in this report.

© 2019 Newsmax Finance. All rights reserved.

   
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Disappointing subscriber numbers for the second quarter shaved $15 billion from Netflix Inc.'s market value as trading opened Thursday.
netflix, subscriber, billion, million
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2019-22-18
Thursday, 18 July 2019 12:22 PM
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