Netflix Stock Plummets on Weak Subscriber Growth

Reed Hastings - Getty - H 2018
Ernesto S. Ruscio/Getty Images for Netflix

The streaming giant added 5.15 million subscribers during the period, far fewer than the 6.2 million it had forecast in April.

Netflix shares on Monday dropped significantly after the company reported slower-than-expected subscriber growth.

The streaming giant, which has seen user growth slow in the U.S. as it nears market saturation, had been counting on its global push to help it continue to grow at a rapid clip. But Netflix's international user growth disappointed on Monday when it reported its second-quarter earnings results. 

Netflix brought in 5.15 million total new members during the quarter, far fewer than the 6.2 million it had forecasted in April and the 6 million that Wall Street was anticipating. The company had planned to add 5 million international members during the period, but instead added 4.47 million. Domestically, Netflix added 670,000 subscribers. It was Netflix's weakest quarter in terms of subscriber growth since the first quarter of 2017, when it also missed its forecasts over total net additions.

Netflix CEO Reed Hastings, in a letter to shareholders, called the quarter "strong but not stellar." He gave little reason for why the company's subscriber additions came in under previous forecasts. For the third quarter, Netflix is being more conservative and forecasting net subscriber additions of 5 million — 650,000 in the U.S. and 4.35 million internationally. 

Later, in a pre-taped Q&A with Bernstein analyst Todd Juenger, CFO David Wells said that the weakness was "broad" across multiple markets and was not clustered in one part of the world. Hastings, meanwhile, noted that the company had a similar subscriber miss in 2016 and course corrected — even though execs never identified a cause for the unexpected quarter. "The fundamentals have never been stronger," he said of the current quarter results. "We're feeling very strong about the business."

Investors have long valued Netflix, based on its ability to continue to grow its subscribe base even as it has raised prices. But they remain skittish about Netflix's ability to sustain growth for an extended period of time, and Monday's earnings report could be viewed as a sign that such momentum is slowing.

Though the company's other financial metrics were in line with analysts expectations, the subscriber growth weakness was enough to send the stock down by as much as 14 percent during afterhours trading.

During the three months from April to June, Netflix brought in revenue of $3.9 million and diluted earnings of 85 cents per share. Analysts were expecting earnings of 79 cents per share and revenue of $3.9 billion during the second quarter. 

In his shareholder letter, Hastings touted Netflix's recent Emmys achievement. Last Thursday, the company toppled HBO from its post as the most-nominated network with 112 nominations. The exec also praised the success of film titles like Set It Up and The Kissing Booth, which he said have been viewed by "tens of millions" of Netflix members, and noted that "as traditional exhibition focuses increasingly on superheroes and sequels, our on-demand service allows us to serve a wide variety of tastes." 

Netflix shares have surged more than 100 percent since the beginning of the year, boosting the company's market cap (around $174 billion on Monday) to above that of entertainment and media giant Disney ($164 billion). The companies are poised to duke it out for streaming audiences next year after Disney launches its planned family-friendly streaming service. But Hastings also called out the consolidation in media — including the recently closed AT&T-Time Warner deal and the pending Fox sale — as creating more competition for the streamer, too. "Our strategy is to simply keep improving, as we've been doing every year in the past," he noted in his letter.

Netflix shares, which fell on Friday as investors began to get antsy about its earnings announcement, closed the day up 1 percent to $400.48. Shares were down just under 14 percent during afterhours trading on the Nasdaq.