16 BARRON’S July22,
Tech Trader
Reality Intrudes on the Netflix Story
By Tae Kim
NETFLIX HAS A PROBLEM. THE COMPANY’S STRENGTHS IN-
cluding scale, value, and a vast library may not be
enoughtomakeupforshortfallsinshowquality.And
no one, not even Netflix, can make a hit every time.
BeforeNetflix’searningsreportthispastWednes-
day,thebullcaseforthestockwasthatthestreaming
giant’sworld-widesubscriberbaseof150millionwas
still a starting point. Plus, there were millions of existing subscribers
who wouldn’t balk at higher prices.
ButNetflix’sauraofinvincibilityisunderquestionafterthecompany
stunned Wall Street with subscriber growth that came in nearly 45%
lower than Netflix’s own projections.
For its second quarter, Netflix added 2.8 million net
newinternationalsubscribersandlost126,000U.S.users,
versusWallStreetexpectationsfor352,000domesticaddi-
tionsand4.8millioninternationaladds.Netflixhadfore-
castatotaloffivemillionnewsubscribers.Thecompany’s
sharesfell10%onThursday,adayaftertheresults.They
fell another 3% on Friday.
Rosenblatt Securities analyst Mark Zgutowicz noted
thatpriorselloffshaveproventobebuyingopportunities
for Netflix’s stock, but this time could be different.
“Our two concerns that this dip may not be like the old times are:
thisisanunprecedentedmissandcompetitionisonthehorizon,”Zguto-
wiczwroteinareport.“Netflixhasnevermissedaninternationalsub-
scriber guide by this much.”
Pricingandcontentarethetwocriticalissuesinthedisappointment.
In its second-quarter letter to shareholders, the company said, “Our
missedforecastwasacrossallregions,butslightlymoresoinregions
with price increases.”
NetflixunveiledpriceincreasesinJanuary.Itsstandardhighdefini-
tion streaming plan in the U.S. rose by 18% to $13 a month, but new
pricing was rolled out gradually, perhaps giving a false impression of
pricingpowerinthefirstquarteroftheyear.GiventheJune-quarter
results,Netflixsubscribersmaystillberationalconsumerssensitiveto
higher costs.
“ThedropinU.S.subscriberssuggeststhatviewersonlowerpricing
tiersdroppedNetflixasaresultofthepriceincrease,”eMarketerana-
lyst Eric Haggstrom wrote in an emailed statement.
The more worrisome issue may be content. Netflix admitted the
weakness of its second-quarter releases were also a factor in its sub-
scriber miss.
“Wedon’tbelievecompetitionwasafactorsincetherewasn’tamate-
rialchangeinthecompetitivelandscape,”thecompanysaidinitsletter.
“Rather,wethinkQ2contentslatedrovelessgrowthinpaidnetadds
than we anticipated.”
Netflixsaiditscurrentquarterhasstartedoffstrongthankstothe
thirdseasonofStrangerThings,whichwasreleasedearlierthismonth.
That’sgoodnewsnow,butitjustconfirmssubscribers’insatiabledesire
forengagingnewcontent.NetflixisonthehookforaStrangerThings-
like hit every quarter if it wants to hit its growth target.
Rivalcontentmakersarenolongerhelping.Initslatestinvestorlet-
ter, Netflix reminded shareholders that most of its Disney content,
alongwithFriendsandTheOffice,willleavetheserviceinthecoming
years.Accordingtothird-partymeasurementservices,FriendsandThe
Office are two of the most-watched shows on Netflix.
InJune,NBCUniversalannounceditsnewstreamingservicewould
haveexclusivedomesticstreamingrightsforTheOfficestartingin2021.
Earlier this month, WarnerMedia said Friends would be exclusive its
HBO Max service when it launches next spring.
Thecompanytriedtominimizethedeparturesbysay-
ingitsmostpopularcurrenttitlesareonlya“lowsingle
digitpercentage”ofthestreaminghoursviewedandany
contentlostwillfreeupmoneyforotherofferings.Itwill
havetofindthoseofferingsinanincreasinglycompetitive
environment.
DisneyissettolaunchitsnewDisney+streamingser-
vice on Nov. 12 at price of $7 a month, about 45% lower
thanNetflix’sstandardplan.Initsfirstyear,Disneyplans
to have a library of 7,500 TV episodes and 500 movies—including the
company’s Pixar, Star Wars, and Marvel films.
EvenNetflixbullsadmitthatinvestorswillbehyper-focusedonfur-
ther subscriber growth hiccups in the coming quarters.
“IfNetflixmissessubsinthequartersafterDisney+launches,the
marketwillmakethecorrelationanyway,andweexpectthedownside
effectonNetflixstockwillbeseveraltimesmorethanusual,”Bernstein
analystToddJuenger,whohasanOutperformratingonNetflixshares,
wrote last week.
So what is the setup for Netflix stock here? Last month, Barron’s
said Netflix was priced for perfection and facing risk from increasing
streamingcompetition.Tobesure,we’vebeenwrongonNetflixstock
inthepast,includinginanAugust2017coverstory.Butthebearishar-
gument may finally be playing out.
Risinggovernmentscrutinyoverthepowerofbigtechnologycompa-
niesalsomakesitunlikelytherewillbeanynear-termacquisitionbid
for Netflix, a longtime source of support for the stock.
Even with the shares down 13% since early June, Netflix stock
tradesat65timesearningsestimatesforthenext12months.Theele-
vated multiple doesn’t seem to factor in the current risks.
Netflixendeditsearningscallforinvestorsthispastweekbycon-
gratulatingcompetitorHBOforitsrecord-breaking137Emmynomina-
tions this year.
“Theycontinuetobethegoldstandardthatwechase,andwe’rere-
allythrilledforthem,”NetflixchiefcontentofficerTedSarandossaid.
That was a gracious gesture, but it’s also one more important re-
minder: Content always wins.
PriorNetflixselloffs
haveproventobe
buyingopportunities
Butthistimefeels
different.