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Netflix Shares Tumble After Weak Q3 Subscriber Growth, Q4 Outlook

Rival streaming services, as well as easing coronavirus lockdown orders, kept Netflix's third quarter subscriber additions in check, sending shares lower in pre-market trading Wednesday.

Netflix Inc.  (NFLX)  shares tumbled Wednesday after the steaming entertainment service posted weaker-than-expected subscriber growth over the third quarter as rivals enticed customers and pandemic lockdowns eased.

Netflix said profits for the three months ending in September were pegged at $1.74 per share, a figure that was essentially flat to the same period last year but well shy of the Street consensus forecast of $2.14 per share. 

Netflix added 2.2 million new paid subscribers over the quarter, helping quarterly revenues rise to $6.436 billion, but fell firmly short of analysts' estimates of a 3.4 million tally on new additions as rival services from Disney  (DIS)  and Comcast  (CMCSA)  enticed customers and lockdown orders eased in major economies around the world.

Fourth quarter subscriber additions were forecast at 6 million, Netflix said, compared to the Refinitiv estimate of 6.5 million.

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"Stepping back, if you think about the Q3 subscriber numbers, it was really very much as expected for the quarter," CFO Spencer Neumann told investors on a conference call late Tuesday. "To look at Q3, the biggest impact was really the first half of the year and that giant pull-forward in subscriber additions in the first half of the year with COVID."

"When we have that much pull-forward, we expected and knew there'd be some level of slowdown, and we tried to project it as best we could," he added. "But it's super, super difficult to forecast with perfect precision given all the unknowns and factors."

Netflix shares were marked 5.4% lower in early trading Wednesday to change hands at $496.34 each, a move that would trim the stock's six-month gain to around 15%.

"Netflix’s Q3 revenue came in largely as expected, although subscriber net additions decelerated more than expected following a pandemic-driven pull-forward of demand in the first half of this year," said Canaccord Genuity analyst Maria Ripps. "Q4 subscriber guidance was modestly below consensus, although Netflix increased its FY20 operating margin target from 16% to 18%, and the company is on track to deliver around $2 billion of free cash flow this year."

"We continue to view Netflix as well-positioned to maintain its leadership position in streaming entertainment as it approaches 200M global subscribers and executes on strategic initiatives across TV, film, animation, and local language content," she added.