Netflix (NFLX) Stock Tanks After Subscription Numbers Decline

Shares of Netflix Inc. (NFLX) were trading off -12.51 or -12.66 percent to $86.30 per share in Tuesday’s premarket after the company reported second quarter earnings which beat market expectations yesterday after the market close. Despite the better than expected earnings, the stock sold off sharply in yesterday’s aftermarket and today’s premarket due to customers quitting as a result of the company increasing its monthly fees.

Netflix stock closed at $98.81 per share, up +0.42 or +0.43 percent in Monday’s regular trading session.

Stock Analysis

Los Gatos, California based Netflix Inc. was founded in 1997 and  is an Internet subscription service offering subscribers unlimited streaming television shows and movies that can be watched on television sets, computers or on mobile devices. The company currently operates in North and South America, the United Kingdom, the Caribbean, Scandinavia, the Netherlands, and Iceland. Netflix expanded its subscription base significantly in 2015, expanding its service to 130 new countries in January, and as of April 18th of this year, the company reported 81 million subscribers worldwide, which includes over 46 million subscribers in the United States.

For Netflix’s second fiscal quarter for 2016, the company reported earnings of $0.09 per share, compared to $0.06 in the same period one year ago, an increase of +50 percent. Revenue for the quarter came in at $2.11 billion versus $1.5 billion in the second quarter of 2015, up more than +33 percent. Net income for the quarter was $41 million compared to last year’s $26 million, a gain of +57.7 percent.  Analysts expected the company to report earnings of $0.02 per share on revenue of $2.1 billion.

Total streaming members in the United States came to 47.1 million versus 42.3 million in 2015’s second quarter up +11.3 percent, while total international streaming members came to 36.1 million compared to 23.3 million last year, an increase of +54.9 percent.

The company’s guidance figures for net new domestic subscribers for the quarter was for about 500,000, nevertheless, the tally fell short at 160,000. Gross additions were as expected by management forecasts, but churn increased when grandfathered price hikes began to take effect. Nevertheless, many customers decided to leave early, which was perceived as a reaction to the company’s April press coverage of the price increases.

The company noted in a statement that, “We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering. Churn of members who were actually un­grandfathered is modest and conforms to our expectations”.

Netflix Chief Executive Officer Reed Hastings expressed confidence that the churn was what made subscription numbers decline, in a conference call yesterday he stated that,  “Well the obvious explanations other than this are competition, which we're pretty confident that it is not a factor because we got this slight uptick in churn in multiple countries the same week and—of course that's not a competitive signature—including Canada, where many of the other SVOD services don't operate”.

For the third quarter, the company issued guidance of 300,000 net new subscribers, which was limited by the Rio Olympics this summer. Nevertheless, as grandfathered price hikes begin to take effect, the 10 percent subscriber increase is expected to lead to a 23 percent increase in domestic revenue. International subscriptions are seen landing approximately 2 million new accounts with the +46 percent year on year increase leading to a 64 percent increase in sales.

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Why Netflix's earnings show fears it would kill TV were wrong

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Published on Jul 19, 2016
By Jay Hawk
Jay Hawk
Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.

Copyrighted 2016. Content published with author's permission.

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