3 Reasons for Netflix Investors to Worry After the Latest Report

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Coming into Netflix‘s (NASDAQ: NFLX) second-quarter report, the market was already nervous about the company’s future. A wave of competition, including Disney, HBO-backed AT&amp;T, and Comcast‘s NBCUniversal, are all about to join the streaming fray. Netflix is losing its two most-watched shows, Friends and The Office, and the company continues to burn billions in cash a year to fuel its subscriber growth.” data-reactid=”11″>Coming into Netflix‘s (NASDAQ: NFLX) second-quarter report, the market was already nervous about the company’s future. A wave of competition, including Disney, HBO-backed AT&T, and Comcast‘s NBCUniversal, are all about to join the streaming fray. Netflix is losing its two most-watched shows, Friends and The Office, and the company continues to burn billions in cash a year to fuel its subscriber growth.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Investors were looking for reassurance from the latest report in the form of another strong round of subscriber growth. However, they got just the opposite. Netflix badly whiffed on its subscriber growth forecast, as it added just 2.7 million members, against its own estimates of 5 million. Even worse, the company lost domestic subscribers for the first time since the "Qwikster debacle" in 2011, when it split the streaming service from the DVD-by-mail business. A net 130,000 American members quit Netflix’s service in the second quarter, leaving it with 60.1 million subscribers at home and 91.5 million abroad.” data-reactid=”12″>Investors were looking for reassurance from the latest report in the form of another strong round of subscriber growth. However, they got just the opposite. Netflix badly whiffed on its subscriber growth forecast, as it added just 2.7 million members, against its own estimates of 5 million. Even worse, the company lost domestic subscribers for the first time since the “Qwikster debacle” in 2011, when it split the streaming service from the DVD-by-mail business. A net 130,000 American members quit Netflix’s service in the second quarter, leaving it with 60.1 million subscribers at home and 91.5 million abroad.

The quarterly loss, though in a seasonally weak quarter, is concerning enough, but there are other reasons to fret over the latest round of results.

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Image source: Netflix.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="1. Good content may not be enough” data-reactid=”26″>1. Good content may not be enough

Management blamed the usual suspects in the earnings release, noting that its record first-quarter additions of 9.6 million members may have pulled some second-quarter subscribers forward, and also pointed a finger at the quarter’s content slate, which it said drove fewer subscriber additions than anticipated.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="That excuse seems a little feeble, considering the company had a number of seemingly strong releases in the period. Dead to Me, a dramedy starring Christina Applegate, attracted 30 million households in its first four weeks. When They See Us, a limited series by Ava DuVernay about the Central Park Five case, was viewed by 25 million accounts, and Netflix had several other shows and movies that 30 million or more households watched.” data-reactid=”28″>That excuse seems a little feeble, considering the company had a number of seemingly strong releases in the period. Dead to Me, a dramedy starring Christina Applegate, attracted 30 million households in its first four weeks. When They See Us, a limited series by Ava DuVernay about the Central Park Five case, was viewed by 25 million accounts, and Netflix had several other shows and movies that 30 million or more households watched.

That the company had a number of strong releases in the quarter and still lost subscribers at home shows that more content from the company — its business plan at this point — may not be enough to keep subscribers engaged.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="2. Prices can only go up so much” data-reactid=”30″>2. Prices can only go up so much

Netflix just wrapped up its steepest price hike in the U.S. since its streaming/DVD split in 2011, lifting the monthly fee from $11 to $13, which was its second price hike in just about 18 months.

Management played down the effect that higher prices may have had on the weak subscriber growth, saying it only missed its forecasts slightly more than expected in regions where it raised prices.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="However, while Netflix is raising prices, some of its competitors are dropping them. Hulu lowered the price for its ad-supported tier from $8 per month to $6 per month earlier this year, and Disney will launch Disney+ in November at just $7 a month. That competition, along with last quarter’s decline, is going to make it harder for Netflix to pass along price increases, especially since its average U.S. subscriber is paying 30% more than they were just two years ago.” data-reactid=”33″>However, while Netflix is raising prices, some of its competitors are dropping them. Hulu lowered the price for its ad-supported tier from $8 per month to $6 per month earlier this year, and Disney will launch Disney+ in November at just $7 a month. That competition, along with last quarter’s decline, is going to make it harder for Netflix to pass along price increases, especially since its average U.S. subscriber is paying 30% more than they were just two years ago.

If it can’t raise prices, and it’s struggling to add subscribers, the stock is going to be in trouble.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="3. The strategy may be getting stale” data-reactid=”35″>3. The strategy may be getting stale

Netflix earned its reputation and a huge valuation on the stock market from its history as a disruptor, having upended the video entertainment industry three separate times. It did it first with the DVD-by-mail model that helped put Blockbuster out of business, and then later with streaming and original content, which have pressured the traditional cable bundle and the way Hollywood does business.

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