Netflix’s Stock Tanks On Missed Subscriber Expectations

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Netflix (NASDAQ: NFLX) announced weaker-than-expected second quarter results, as its earnings per share came in ahead but revenue fell short of market expectations. In addition, Netflix’s subscriber growth slowed and missed expectations of 6.27 million and reported net streaming additions of 5.15 million in the quarter. As a result, the company’s stock fell during after-hours trading. Netflix also witnessed a sharp appreciation in the U.S. dollar in the second quarter, which negatively impacted the company’s results. Despite this, the company’s overall revenues grew a robust 40% year-over-year (y-o-y) to $3.9 billion, driven by growth in subscribers across both the U.S. and international streaming markets. The international subscriber base increased at a rapid pace (40% y-o-y) once again, while domestic subscriber base growth stabilized in the low double digits.

We have a $362 price estimate for Netflix, which is slightly below the current market price. Our interactive dashboard details our forecasts and estimates for the company’s Q3. Below we outline the key takeaways from Netflix’s Q2.

Streaming Business Continues To Grow At A Relatively Slower Pace

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Streaming revenues grew 43% to $3.8 billion as the company’s subscriber base grew across both U.S. and international streaming services. The U.S. Streaming revenues increased by 26% y-o-y to $1.89 billion. While paid memberships grew by 11% to 56 million (5.6 million addition y-o-y, 872K sequentially), total membership also grew by 11% to 57.4 million (5.4 million addition y-o-y, 674K sequentially). In addition, the contribution margins for the U.S. streaming business increased to 39.1% from 37.2%.

International streaming revenues grew 65% y-o-y to 1.9 billion. In Q2, the total membership for international streaming services grew to 72.7 million (20.7 million addition y-o-y, 4.5 million sequentially), while paid subscribers grew to 68.4 million (19.6 million addition y-o-y, 4.5 million sequentially). Additionally, the contribution margins grew to 15.5% from a negative 1.1%, largely due to the timing of content deals that have been pushed back to later quarters. The company’s net addition grew slower than previous quarters, probably due to the broadcast of FIFA World Cup in June, which could have drawn a massive number of viewers away from the platform.

Future Outlook

Netflix expects 5 million global net additions (650K in the U.S. and 4.35 million for the international segment), which is fairly conservative as compared to a 5.9 million consensus estimate.

Netflix saw its stock gain nearly 50% in 2017, and is already up more than 100% year-to-date as of Juy 17. The company should continue to benefit from its strong foothold in the streaming business as well as a robust lineup of TV shows and films in 2018. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. As a result, it is spending a significant portion of its content budget on original shows. The company plans to spend as much as $8 billion on shows and movies in 2018, up from $6 billion earmarked for content in 2017, which should drive subscriber growth but will weigh on margins.

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