UNBREAKABLE

Netflix set a record for subscriber growth, but investors are worried it’s hitting a wall

Obsession
Glass
Obsession
Glass

Netflix’s stock closed regular trading hours down 3% on Monday (Apr. 19) after Amazon announced a rival, monthly video service that’s cheaper than what Netflix offers. Things got worse after the bell when the streaming-video giant released its first-quarter earnings (pdf)— even though it reported record subscriber growth.

The Los Gatos, California, company added 6.74 million subscribers during the first quarter of 2016—2.23 million in the US and 4.51 million abroad—bringing its total member base up to 81 million. That trumped its forecast for the quarter and prior mark of 5.59 million add-ons in the final quarter of 2015.

Netflix’s global growth outlook for the current quarter, however, came in far below analyst targets. The company expects to add just 2 million international subscribers during the second quarter, well below the 3.5 million additions analysts polled by FactSet projected. The service moved into 130 new countries in January, but Netflix said the impact of that expansion was felt during the previous quarter.

By comparison, 2.4 million people overseas signed up for Netflix during the second quarter of 2015. But the company said in a letter to investors that it’s not fair to compare the two, because Netflix pushed into the big Australia/New Zealand market at that time.

“You haven’t yet seen a normalized pattern of growth from us, in terms of a year-on-year growth expectations across our international markets because we have been layering on new markets as we go,” said David Wells, chief financial officer at Netflix, in an earnings interview. “We are mindful of the fact that we have got these large blooms of launches … that aren’t going to continue forward because they are addressing pent up demand.”

Still, the market’s initial reaction to the news suggests that investors are worried the best-performing stock of 2015 is hitting a wall. Netflix shares dived 12% to $95 after the bell.

Netflix’s tempered growth forecast isn’t necessarily a bad sign. The company could be lowballing investors to manage their expectations. Netflix missed US subscriber growth targets for two-straight quarters in 2015, and then gave a modest projection for the first quarter of 2016—1.75 million—a number it soundly beat. (The company said first-quarter projections were low because it underestimated the success of original TV debuts like Fuller House, Making a Murder, and the second season of Marvel’s Daredevil.)

Netflix is also factoring in potential subscriber losses, as it prepares to raise prices for members with grandfathered plans.

As for Netflix’s increasing competition from Amazon, CEO Reed Hastings said there are still huge opportunities for Netflix to win over consumers who don’t yet spend their evenings glued to Jessica Jones or The Unbreakable Kimmy Schmidt.

“If you think about your last 30 days, and analyze the evenings you did not watch Netflix, you can understand how broad our competition really is,” said Hastings. “Whether you played video games, surfed the web, watched a DVD, TVOD, or linear TV, wandered through YouTube, read a book, streamed Hulu or Amazon, or pirated content (hopefully not) you can see the market for relaxation time and disposable income is huge, and we are but a little boat in a vast sea.”

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