What's going on?
“Are you still watching?”. On Tuesday, the answer was a resounding yes as Netflix’s third-quarter results beat expectations and the stock rose by 14% (tweet this).
What does this mean?
Netflix turned the tide of its subscriber growth disappointment. Last quarter, it signed up 1.1 million more subscribers in the US and almost 6 million elsewhere in the world, eclipsing investors’ forecasts. And Netflix had an encore: next quarter, it’s expecting to add 9.4 million new users worldwide (7.6 million of whom will go on to use the paid service), while investors were expecting a mere 7.2 million. More subscribers equal more cash – so Netflix expects to burn through less of it this year.
Why should I care?
For markets: Some analysts were wrong, but their hearts were in the right place.
Before Tuesday, industry analysts were pessimistic about Netflix: Morgan Stanley, for example, lowered its estimate of what the company was worth. But that assessment wasn’t simply due to concerns over quarterly results (and just as well). A strengthening US dollar could hit Netflix’s profit, because money it makes overseas is worth less (i.e. buys fewer dollars) – and over 40% of Netflix’s sales come from outside the US. On top of that, rising interest rates could mean higher costs – Netflix will probably have to pay more interest on any new debt, and it’s likely to need about $5 billion of that over the next two years to fund new content creation.
The bigger picture: Video streaming rivals fast forward.
Rivals might see Netflix’s growth as an encouragement to ramp up their own efforts to carve out a slice of that dependable monthly subscription pie. Disney’s already started pulling its content from Netflix for its own platform and AT&T’s Warner Media (valar morghulis) also plans to launch an online streaming service next year. Apple, too, is reportedly entering the fray. There are only so many hours in the day, so watch this space – or that one, or that one…