Netflix shares drop on weak subscriber growth

RESULTS season is well and truly under way and Wednesday brought second quarter numbers from US streaming giant Netflix.

Revenues continue to climb rapidly, up 26 per cent year-on-year to $4.9billion (£3.9billion) and operating profits of $706million came in well above market expectations.

However, it wasn’t all good news. The group added 2.7 million new subscribers in the quarter, well short of prior market expectations.

Back in April, management was hopeful of adding 5 million new subscribers.

The news caused Netflix shares to fall 12 per cent after the announcement. Disappointing, yes, but investors should be accustomed to the ups and downs of the stock by now.

While Netfix may be a $142billion giant, it still behaves much like a smaller company.

That’s because it’s a fast-moving growth story that’s still some way off its potential. And knowing how quickly it’ll get there is difficult.

What is for certain is that for Netflix to justify its lofty market cap, more progress is required.

That’s because, despite reporting a profit, the group still has more cash going out than coming in. The difference was $594million last quarter.

That was primarily due to the $3.3billion it spent on blockbuster content.

Viewers can look forward to new series of Stranger Things, The Crown and Orange Is The New Black in the second half of the year.

The group is confident those kind of titles will send the subscriber base well beyond its current 151.6 million and that it can raise prices for its existing customers without losing too many. Lenders agree too, which explains why Netflix has found it so easy to counter the operating outflows with loans.

If that happens, the scalability of the business means cash flow could improve rapidly, explaining the shares’ premium valuation of 69 times expected earnings. “This article is for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”