Netflix Hit With Shareholder Lawsuit After Missing Growth Projections

The streaming giant added just 2.7 million paid members after forecasting nearly twice that amount.
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Netflix CEO Reed Hastings

When Netflix told shareholders last Wednesday that it had lost U.S. streaming customers for the first time in eight years and that just 2.7 million subscribers had been added overall in the second quarter, the company's stock immediately nosedived about 13 percent. Now, just days later, a Netflix shareholder has filed a putative class action over the company's missed projections.

In California federal court, Johan Wallerstein is suing Netflix, CEO Reed Hastings and CFO Spencer Neumann over statements leading up to last week's announcement.

The complaint (read here) points to an April 16 letter to shareholders that projected that total paid net subscriber additions would be 5 million and how price increases for the streaming services had resulted in what the company termed an expected response.

An aftermarket hours earning call from Neumann is also quoted. The company's CFO talked about "consistent" growth, adding, "There’s just some temporary churn that enters the system in the midst of rolling out those price changes. But that’s why you see more of the net adds weighted to our international segments in Q2 but overall very healthy, going according to plan and very strong growth for the first half of the year and putting us on track... ."

The plaintiff, represented by Laurence Rosen, alleges such statements were "materially false and/or misleading" for failing to disclose that Netflix would not be able to gain its expected target number and would in fact lose U.S. subscribers.

Most corporations inoculate themselves from any forward-looking statements under the safe harbor provisions of  the Private Securities Litigation Reform Act of 1995.

Nevertheless, Rosen is giving it a go over Netflix's missed projections, alleging in the suit that the company and its top executives acted with the requisite knowledge that statements were untrue or misleading.