Commentary

Netflix Shares Plunge On Q2 Prospects Even As Q1 Beats Expectations

After projecting less growth than analysts lining the shoreline had anticipated, Netflix CEO Reed Hastings yesterday described his streaming and original-content company as “but a little boat in a vast sea.” That’s a good thing, for the sea is teeming with the likes of video games, HBO, YouTube, Hulu, Amazon, e-books and even that quaint activity once known as Web surfing.

“We earn a tiny fraction of consumers’ time and money, and have lots of opportunity ahead to win more of your evenings away from all those other activities if we can keep improving,” Hastings wrote in a letter to shareholders.

Still, Netflix’ internal forecast that it expects to add a mere 2.5 million members (500,000 in the U.S. and 2 million internationally) in the second quarter was less than the 3.5 million analysts had expected, Emily Steel reports for the New York Times, and its stock took a beating.

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“That cloudy forecast sent shares down more than 10% in after-hours trading, as Netflix has tied its future to its bold global push,” Steel writes. “The company has been pouring resources into its expanding international footprint, telling investors that it would run at break-even profitability until the end of 2016 as it continued to roll out the service abroad and increased its investment in content.”

In his letter, Hastings blamed “a modest effect from the beginning of the un-grandfathering” for the tepid U.S. growth. 

“Next month, many members — possibly as many as 17 million, according to USB Investment Bank — will begin seeing a $2 monthly increase to its most popular subscription plan, upping their monthly bill to $9.99. Netflix announced the increase two years ago and had grandfathered long-term customers with the lower price,” Mike Snider reports for USA Today

On the plus side, Netflix “actually topped subscriber expectations for the year's first quarter,” CNBC’s Everett Rosenfeld writes. “The company said it gained a net 6.74 million memberships — 2.23 million in the U.S. and 4.51 million internationally. Wall Street had expected on average that Netflix would announce a 4.36 million net gain in memberships internationally and 1.77 million net adds in the U.S., according to data from StreetAccount.”

Even as the shares tumbled, two analysts who spoke to CNBC were in a positive state of mind about the company. “Spooked” by the Q2 estimates, S&P Capital IQ media analyst Tuna Amobi still rates the stock a “buy.”  

FBR Capital Markets’ Barton Crockett points out that “you get the biggest pop when you launch in a new country internationally, and then you get a bit of an ease-up. The data that we're tracking says that they're still in hyper-growth in emerging markets like Latin America, but they're starting to cool in the developed countries like the U.S., U.K., Canada …” 

Fortune’s Matthew Ingram puts it all in perspective: “It’s not easy being the king. In Netflix’s case, being the most popular streaming-video service means that expectations for the company are sky-high — and so is the share price. When you trade at those levels, even the tiniest sign of weakness can trigger a wave of fear, which is exactly what happened” yesterday.

“Meanwhile, Netflix rival Amazon announced Sunday night that its monthly subscription option for its bundle of Prime services, like free shipping and original content, would include a monthly subscription option,” Frank Pallotta reports for CNN Money. “Up until this point, Prime service has been only available as a $99 annual subscription. It will now have Prime Video, a stand-alone service for its movie and TV collection, that will cost $8.99 a month.” 

“The move pits the Seattle online retailer more directly against Netflix, which also happens to be one of the biggest customers of Amazon’s cloud-computing services. For years, the two have worked to one-up each other with exclusive content deals and original series like Netflix’s ‘House of Cards’ and Amazon’s ‘Mozart in the Jungle,’ Greg Bensinger writes for the Wall Street Journal.

“It's natural that everybody is coming in as they realize that the future is Internet TV…,” Hastings said yesterday in an earnings call Q&A transcribed by Seeking Alpha. “This is all part of the natural evolution from linear TV to internet TV.”

Or, as Horatio Thelonious Ignacious Crustaceous Sebastian the Crab tells The Little Mermaid, “life under the sea is better than anything they got up there.”

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