Netflix Disappoints the True Believers

Netflix Inc. is one of those companies that functions like a religion: Either you believe, or you don’t. (See also: Tesla and Amazon.) That’s how it goes for a company that is valued at 167 times its earnings over the past year.


The tricky thing is if there are cracks in the belief system, the whole religion is tested. That is what happened to Netflix on Monday when it reported adding about 670,000 net new U.S. streaming subscribers in the second quarter — about half as many as the company had forecast. Including disappointing customer growth outside the U.S., the company’s 5.15 million net streaming sign-ups fell short of Netflix’s own forecast from April by more than a million subscribers. Its third-quarter subscriber forecasts were also below the average expectations of stock analysts.

Netflix lives or dies by its subscriber growth, which is both a financial imperative and proof for the company’s faithful. Given the company’s high-risk strategy of splurging on programming to become a global entertainment powerhouse, nothing else matters at Netflix except for the pace of new paying customers, and the company’s investors react accordingly. Predictably, shares of Netflix plummeted 13 percent in after-hours trading Monday after it released quarterly earnings.

Netflix pointed out that the company sometimes exceeds its own forecast, and sometimes it falls short. It said a strong U.S. dollar hurt its reported international revenue. Sure, but those aren’t sufficient explanations for why the company added far fewer new subscribers than it forecast a few months ago. Are price increases for most U.S. Netflix customers starting to discourage new sign-ups or causing people to quit? Were potential new customers less interested in the company’s newest crop of original programming? Is this just a blip in Netflix’s mostly uninterrupted string of growth? The company doesn’t offer a full explanation for what is going wrong.

And the explanation matters. For Netflix, growth is manifest destiny because the company has been spending in anticipation of winding up with far more paying customers than it has now. The company spent an astonishing $10.1 billion on cash programming costs in the last 12 months — or about four and half times what HBO spent in 2017 on buying or producing its movies and TV shows…..Read more>>

Source:- bloomberg