Netflix shares plunge as growth in subscriber numbers slows

Posted July 18, 2018

Deutsche Bank downgraded Netflix to Hold from Buy, saying that the subscriber number miss was not cause for alarm, but was a reason to reconsider the stock's soaring valuation.

The streaming service added 5.15 million users, which is 11.29% lower than the expected 6.2 million. Revenue climbed 6 percent to $3.9 billion.

With all this, the stock is tanking.

Despite this, Netflix added 5.1 million households over the three-month period - giving it 130 million subscribers overall with 57.4 million in the United States and nine million in the UK.

In its letter to shareholders Monday, Netflix acknowledged that it expects to face more competition going forward, including from AT&T (T), which now owns HBO, Warner Bros. and CNN.

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In its earnings statement, Netflix said, "YouTube and Netflix are two leading global (ex-China) internet entertainment services".

A call with executives was scheduled for the evening of July 16. Netflix is an extremely expensive stock - at market close, it was trading at $400 per share.

The company added 670,000 subscribers in the U.S. and 4.5 million internationally in its second quarter.

Still, Netflix ended Q2 with 130.1 million global subs, up 25% year over year, with 56 million in the US and 72.8 million elsewhere. Netflix fell short of its forecasts a couple years ago, a shortfall the company blamed at the time on the transition to chip-based credit cards.

Analyst Jeffrey Wlodarczak at Pivotal described the second quarter performance and third quarter estimates as "a relative hiccup".

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Total streaming revenue for Q2 18 is US$3,814 million, up from US$2,671 million during the same period past year.

"I think it's more of a one-quarter issue that shouldn't bleed into the next few quarters, despite the company's conservative guidance for September", Ives was quoted as saying by Marketwatch. The company will spend as much as $8 billion on programming this year. Apple Inc., meanwhile, is spending more than $1 billion on original programming.

Going forward, "We anticipate more competition from the combined AT&T/WarnerMedia, from the combined Fox/Disney or Fox/Comcast as well as from worldwide players like Germany's ProSieben and Salto in France", the company said in the investor letter.

Netflix said Monday that it expects more competition, but dismissed any potential negative impact on its business.

"Our strategy is to simply keep improving", Netflix said.

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