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Netflix stock plunges on big miss in paid subscriber additions in Q2

Netflix (NASDAQ: NFLX) stock tumbled 11% during pre-market trading on Wednesday after the streaming giant said it added only 2.7 million paid subscribers in Q2 2019, missing its own target of 5 million.

At the end of the second quarter, Netflix had 151.56 million paid subscribers, compared to 124.35 million a year ago.

Netflix adds fewer paid members than expected in Q2

For the current quarter, the streaming giant expects to add 7 million paid members, which would represent an improvement over 6.1 million it achieved in the third quarter of 2018.

Netflix said regions with price increases contributed more to the missed forecast.

‘Competition not a factor’

The lower net additions come at a time when the streaming industry is seeing cut-throat competition with the arrival of Disney and Apple. However, Netflix stresses this was not the reason for the lower net additions during the quarter.

Disney vs Netflix stock
Image by mohamed Hassan from Pixabay

“We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions. Rather, we think Q2’s content slate drove less growth in paid net adds than we anticipated,” the company said in a statement.  

Netflix added that it would remain ad-free, despite the competition in the industry.

Mixed bag financials

Netflix’s revenues grew 26% during the second quarter to $4.92 billion, driven by a hike in subscription fees in multiple markets. However, this came in slightly below the street estimate of $4.93 billion

Netflix had hiked subscription fees in Brazil and Mexico during the second quarter. Separately, a part of the fee hike in the US, which was announced in January, took place in the second quarter. 

READ: Has Roku run out of its firepower? Not necessarily

Net income, meanwhile, fell to $0.60 per share from $0.85 per share a year ago, hurt by higher taxes the company has to pay towards corporate restructuring. Analysts had projected earnings of just $0.56 per share.   

Free cash flow at the end of Q2 was (-) 593.7 million, wider than a year ago, as it continues to spend heavily on original content.

Q3 Guidance

For the current quarter, Netflix expects 31% growth in net revenues to $5.25 billion. Outlook for diluted EPS is pegged at $1.04.

Losing popular shows Friends and The Office will force Netflix to rethink its growth strategy. The company had earlier announced plans to cut down spending on shows that don’t have the expected level of viewership.

But it also has some original shows of its own, like Stranger Things, which had record viewership for season 3. Despite bad reviews, its movie production Murder Mystery starring Adam Sandler and Jennifer Aniston also had record viewership. Hence it will be a tricky business finding the balance.

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