Business

Netflix shares down 5% after streaming company has 'hiccup' in subscriber growth

Netflix stocks initially fell more than 14 per cent Tuesday after the company announced it added fewer subscribers in the second quarter than analysts were expecting. But analysts are calling the results a hiccup.

Stocks opened at $346.95 apiece on Tuesday morning, rebounded back up to around $379 by end of day

Netflix reported overall membership growth for the second quarter was 5.2 million — the same as the second quarter last year — but was lower than its forecast of 6.2 million. (Elise Amendola/Associated Press)

Netflix stocks ended just five per cent down on Tuesday after initially falling more than 14 per cent after the company announced it added fewer subscribers in the second quarter than analysts were expecting on Monday.

The company also downgraded its expectations for the third quarter, but analysts are calling the results a hiccup and say the company remains a compelling investment opportunity in the long run.

Prior to the earnings coming out, Netflix shares were changing hands at around $400 US apiece. Stocks opened at $346.95 apiece on Tuesday morning but rebounded back up to $379.48 by the time stock markets closed. 

Bloomberg analyst Geetha Ranganathan said the subscriber miss and weak third quarter estimates cloud future prospects, but "the company's global long-term-thesis remains compelling."

Netflix reported lower than expected subscriber growth for the first time in five quarters. Analysts at Bloomberg expected the company would add about five million overseas customers during the quarter, but only 4.47 million were added.

Domestic subscriptions were even lower — less than a million Americans signed up for the service during the past three months — and the numbers fell 37 per cent short of Pivotal Research Group's estimate of 1.2 million.

The streaming giant reported overall membership growth was 5.2 million — the same as the second quarter last year — but was lower than its forecast of 6.2 million.

Ranganathan said Netflix pinned the shortfall on overaggressive earnings estimates in a "seasonally weaker [second quarter], partly aggravated by audience distraction from the World Cup."

Netflix expects third quarter revenue to be $3.99 billion US and new subscription adds of five million, compared with 5.3 million in the same quarter last year. Within that, the company says it's expecting to add 4.35 million people internationally, and just 650,000 people in the U.S.

Analyst Jeffrey Wlodarczak at Pivotal described the second quarter performance and third quarter estimates as "a relative hiccup."

"[Netflix's] ultimate opportunity remains unquestionably large," Wlodarczak said, "although moderately smaller than previously modelled."

But Pivotal nonetheless downgraded their 2019 target price for Netflix shares, by $65 to $435, which suggests limited upside for the shares from here.

They're also worried about the amount of cash Netflix might spend this year — up to $4 billion by J.P. Morgan estimates — and the pace of subscriber growth.

Despite the subscriber miss, the company's second quarter revenue was $3.9 billion US and its net income was $384 million US, up from last year's second quarter net income of $66 million.

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