Netflix plummets as subscriber growth misses expectations
NETFLIX is one of those companies that functions like a religion – either you believe, or you don’t. (See also Tesla and Amazon.) That’s how it goes for a company that is valued at 167 times its earnings over the past year.
The tricky thing is, if there are cracks in the belief system, the whole religion is tested. That is what happened to Netflix on Monday, when it reported adding about 670 000 net new US streaming subscribers in the second quarter – about half as many as the company had forecast. Including disappointing customer growth outside the US, the company’s 5.15 million net streaming signups fell short of Netflix’s own forecast from April by more than a million subscribers. Its third-quarter subscriber forecasts were also below the average expectations of stock analysts.
Netflix lives or dies by its subscriber growth, which is both a financial imperative and proof for the company’s faithful. Given the company’s high-risk strategy of splurging on programming to become a global entertainment powerhouse, nothing else matters at Netflix except for the pace of new paying customers, and the company’s investors react accordingly. Predictably, shares of Netflix plummeted 13 percent in after-hours trading on Monday after it released quarterly earnings.
Netflix pointed out that the company sometimes exceeds its own forecast, and sometimes it falls short.
Strong dollar
It said a strong US dollar hurt its reported international revenue. Sure, but those aren’t sufficient explanations for why the company added far fewer new subscribers than it forecast a few months ago.
Are price increases for most US Netflix customers starting to discourage new sign-ups or causing people to quit? Were potential new customers less interested in the company’s newest crop of original programming? Is this just a blip in Netflix’s mostly uninterrupted string of growth? The company doesn’t offer a full explanation for what is going wrong.
And the explanation matters. For Netflix, growth is manifest destiny, because the company has been spending in anticipation of winding up with far more paying customers than it has now. The company spent an astonishing $10.1 billion (R133.55bn) on cash programming costs in the last 12 months — or about four and half times what HBO spent in 2017 on buying or producing its movies and TV shows.
The costs for marketing Netflix programming also nearly doubled to $1bn in the first six months of 2018 from a year earlier, as the company ramped up spending to generate more attention and viewers for the hundreds of entertainment series and movies it releases each year.
In all, Netflix has committed to spending an astonishing – that word again – $18bn in coming years for its entertainment programming.