What's going on here?
Video streaming service Netflix saw its stock fall almost 15% after it said its subscriber base grew much less than expected in the second quarter. It’s another example of how punishing it can be for a tech company that doesn’t meet growth expectations.
What does this mean?
Netflix added 1.7 million net new members in the second quarter, which was well below their own forecast of 2.5 million. The company said that new additions were actually on target, but more subscribers than expected quit the service. No, it wasn’t because of Ashton Kutcher in The Ranch! Netflix says people left due to press coverage of a price increase that affected subscribers who signed up before May 2014. Interestingly, Netflix argues that people read the press coverage and thought its fees were increasing for everyone – and so even people that wouldn’t have been affected left the service. Bad PR or not, user growth missed expectations – and investors hate that.
Why should I care?
For the stock: When a stock is priced for growth, it has to deliver – or else.
Netflix’s stock is down more than 30% since its peak in December mainly because it’s subscriber growth has slowed. If Netflix is to grow to its desired size, it‘s going to have to nail its current international build-out. The company says that nearly 1 billion people who currently pay for a TV service will migrate to streaming services in the future – and that will help drive its growth.
The bigger picture: Netflix doesn’t think competition from other streaming services is hurting them.
It believes that the various options (like Hulu, Amazon Prime Video and others) are all growing primarily at the expense of regular TV – and not cannibalizing each other’s growth. However, many investors are skeptical of that claim – and you, as a consumer who presumably chooses between various streaming options, might be too!