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Netflix Shares Tumble After Cautious Q3 Subscriber Growth Outlook: Ted Sarandos Named Co-CEO

Netflix had a near record quarter for new subscriber additions over the three months ending in June, but cautioned investors that the pace of new additions would slow over the second half of the year.

Netflix Inc. NFLX shares slumped lower Friday after it cautioned investors that new subscribers to its video streaming platform would slow in the coming months, following near record gains during the peak of the coronavirus pandemic.

Netflix added 10.1 million paid subscribers over the three months ending in June, the company said late Thursday, its second-highest total on record and firmly ahead of the Street consensus forecast. The second quarter tally lifted the first half total to 26 million -- more than twice the pace of last year's gains -- but management said that isn't likely to continue in the months ahead as more people return to work and school as the coronavirus pandemic wanes.  

Looking into the third quarter, Netflix said paid subscribers would likely grow by 2.5 million, less than half the consensus forecast. 

"The things we are certain of is the Internet is growing. It's a bigger part of people's lives, thankfully, and people want entertainment. They want to be able to escape and connect, whether times are difficult or joyous," CEO Reed Hastings told investors on a conference call late Thursday. "That's pulling up. We've had an increase in subscriber growth in March. It's essentially a pull forward of the rest of the year."

"So our guess is that subs will be light in Q3 and Q4 relative to prior years because of that. But we don't use the words guess and guesswork lightly," he added. "We use them because it's a bunch of us feeling the wind, and it's hard to say. But again, will Internet entertainment be more and more important over the next five years? Nothing has changed in that."

Netflix shares were marked 5.15% lower in early trading Friday to change hands at $500.25 each. That move would still leave the stock with a year-to-date gain of around 53%. 

The stronger-than-expected second quarter subscriber gains, however, as well as the postponement of new content production owing to coronavirus restrictions on social distancing, puts Netflix in a positive to be cash-flow positive by the end of the year, the company said.

From a bottom line perspective, Netflix posted diluted earnings of $1.59 per share, well below the Street consensus forecast of $1.81 per share, and revenues of $6.1 billion.

Netflix also promoted content chief Ted Sarandos to the role of co-CEO, alongside Hastings, who insisted he was 'in for a decade' with the company he founded.  

"While lighter-than-expected Q3 guidance implies that there may have been a pull forward of demand over recent months, management reiterated that its 2H20 and FY21 content slate remains largely intact despite the impact of COVID-19 on production globally, which should support further subscriber growth over time," said Canaccord Genuity analyst Maria Ripps, who carries a buy rating with a $550 price target on the stock.

"Netflix's content library investment allowed the company to evolve from a platform to watch re-runs to a quality source of original content, and now a destination for some of the biggest movie premieres, which makes the service an essential part of any consumer entertainment bundle," she added.