Netflix’s share price plunges as “slow” growth weighs it down
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Netflix’s share price plunges as “slow” growth weighs it down

Imagine only adding 5.2 million new customers to your business in a single quarter. I know – the shame! Yet, this “slow” growth is precisely what has caused Netflix’s shares to plummet after earnings were released last night. A few caveats are in order: first off, investors aren’t crazy to have held Netflix to such high standards – the company’s guidance suggested it would add almost a million more viewers to its streaming video on demand (SVOD) platform than it actually did. And analysts, giddy after consecutive quarters of unbelievable outperformance, were equally optimistic. But the important question is this: how bad is it really?

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Netflix is the clear market leader in the SVOD space, and it’s worth as much as $13 billion more than Disney (well, it was before the share price started to sink, anyway). In other words, if not immune to competition, Netflix is in a fantastic space, both within its own industry and the wider entertainment space. One lackluster quarter doesn’t change that – and it doesn’t change Netflix’s long-term story.

Secondly, it’s worth asking how lackluster any quarter that sees millions of new subscribers flocking to a company’s platform really is. There are two big criticisms of Netflix’s growth over the three-month period: the first is the simple one, that it just didn’t add enough subscribers. On the face of it, that’s ridiculous. Yes, it missed targets (and, incidentally, lowered some of the same targets for the coming quarter), but another ten million eyes worldwide is still an incredible amount. Second comes the more worrying criticism: Netflix hasn’t managed to create a blockbuster new show this quarter. Now, to many investors, this might sound like the lesser concern of the two – but in fact, it’s far more serious.

Netflix’s incredible growth has been predicated on its ability to deliver blockbuster original content. Over the last year those hits have included 80s sci-fi/horror nostalgia-fest Stranger Things and the company’s first foray into feature length films, like Will Smith urban fantasy Bright. But this strategy isn’t new – it goes back to 2013’s House of Cards. This content isn’t cheap – Netflix has earmarked an incredible $13 billion to purchase content this year, and as much as 85% of it will go towards developing exclusive, original content. If that content fails to live up to the hype, it becomes an incredibly costly endeavor.

That, at least, is the worry that some analysts are voicing. And – of course – it’s a serious worry. But is it justified? While it is always possible for a company to lose its way, there’s nothing to suggest that’s happening with Netflix. This year, the company has ploughed money into original content, poached top creative talent from a variety of studios, released a number of ambitious projects, and garnered more Emmy nominations than HBO (to put that in context, HBO has been number one for nominations for the last 17 years). Add to this the fact that Netflix is on the cusp of releasing the next series of Orange is the New Black, has renewed Stranger Things for another two seasons, and is planning to release more movies than any single studio over the coming year and the answer to all this becomes clearer: Netflix’s content machine is a very long way away from being broken.

So, all in all, there were a few disappointments last night. But Netflix’s position at the top of the SVOD ladder remains intact. Stepping back from the immense growth expectations, it’s hard to find fault with a service that adds five million customers in three months. And, although the share price has taken a hit since the figures emerged, let’s put that in perspective: on Monday afternoon, Netflix was the S&P 500’s best performing stock of the year so far, having returned almost 110% in just seven and a half months.

And hey, silver lining: despite the miss on new viewers (and a slight miss on revenue), Netflix beat the Street on earnings. At the end of the day, the company summed it up pretty straightforwardly in a letter to shareholders: “we had a strong but not stellar Q2.” There’s not much more to say than that.

Disclosure
Dominion holds Netflix in its Global Trends Ecommerce Fund.


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