
Netflix Tanks After Earnings; Is Growth Really Just a House of Cards?
The popular streaming video Netflix (NFLX) - Get Report service saw shares fall more than 13% following the company's earnings release. The massive decline is an indication that some investors no longer believe Netflix has momentum. Netflix has always been seen as a huge growth opportunity, but with massive potential comes with risks and often big declines as we are seeing now.
The main reason shares of Netflix fell so hard were due to the company's forecasted earnings and poor subscriber growth figures.
Management believes that after posting a loss of $69 million this past quarter, it will post a loss of $95 million in the third quarter. While its international expansion is costing the company a lot of money today and obviously hurting earnings, these growing pains should level out eventually. Management believes that leveling will happen sometime in 2017.
Not only is growth costing the company a lot of money at this time, subscriber growth is slowing. This quarter Netflix reported it had 85.5 million users, which is up from 81.5 million it reported in the first quarter, and way higher than the 65.6 million it reported during the second quarter of 2015. As for growth slowing, Netflix reported subscribers grew by 4.9% this quarter, down from 9% growth last quarter, 8.1% during the fourth quarter of 2015 and even 5.3% it reported during the second quarter of 2015.
What is more concerning to some investors is that when subscriber numbers are broken down to U.S. and international, the U.S.-based growth is dismal. This quarter subscribers grew only 0.3%.
However, while some analysts have noted slow growth as an issue for Netflix, it may not be as terrible as it is made out to be. The company said most of the slowing subscriber numbers came from the increase in pricing, which caused a high amount of churn. Furthermore, House of Cards and Orange is the New Black both came out in the early spring, meaning some users could have signed up and then dropped the service a month later, inflating churn.
While an inflated churn is not good for investors or the company because it shows that Netflix users aren't really that loyal, it would indicate that the company has a product that consumers want, just not all the time at this point. That could lead to users keeping subscriptions longer if Netflix keeps pumping out hit shows that people want to see.
With the way we watch TV changing rapidly, high churn should be expected in a mature market such as the U.S. Remember, lots of people using Netflix "cut the cord" for other services. But if these subscribers are just service hopping from Netflix after the House of Cards release to Hulu to Time Warner's HBO during Game of Thrones Season to Amazon's Prime, then it is likely they will be back in the future.
Lastly, while the U.S. growth numbers aren't good, investors need to remember that the U.S. market is much smaller than the international opportunity in front of Netflix. U.S. subscribers can service hop all they want and it will matter less, if Netflix can get to new markets were other services aren't yet available. That's why the stock remains a stellar growth opportunity.
International growth should be what you are watching and paying a close eye to. Costs will go down as the company builds out and if new international users get on board, massive growth figures will resume, making today a great time to buy. With that being said, Netflix should not be seen as a "buy-and-hold" forever company. You need to watch what is happening with the company and others like Amazon and how it will affect your investment.
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This article is commentary by an independent contributor. At the time of publication, the author held positions in Amazon and Netflix.










