Netflix, the Stock Market’s Big Hope, Disappoints

Posted July 16, 2018 9:16 p.m. EDT

When rising interest rates and trade tensions weighed on the stock market in recent months, investors could always comfort themselves with four words: “There is always Netflix.”

Not on Monday.

Netflix disappointed investors with news that it added substantially fewer subscribers in the second quarter than expected. The company’s stock, which had more than doubled this year as the wider market stalled, plunged 14 percent after the close of regular trading.

While Netflix’s revenue and profits are still surging, the shortfall in subscriber growth is a reminder that companies priced for perfection can disappoint when optimism seems to be at a peak. And the slip-up will revive skepticism about Netflix’s business model.

Netflix had forecast that it would add 1.2 million new U.S. subscribers in the second quarter, but it signed up only 674,000. Internationally, the company gained 4.5 million new subscribers in the quarter, below Netflix’s expectations for 5 million. Revenue rose 40 percent from a year earlier to $3.91 billion but was slightly below the total that Wall Street analysts had expected.

Netflix is hardly in trouble. Paid subscriptions were still up 26 percent from a year earlier. And in recent quarters, subscriber numbers exceeded Netflix’s projections, so Monday’s disappointment may not amount to much in the scheme of things.

Still, the company’s stock shows that Netflix has a lot to live up to. The company’s share price, after Monday’s plunge, is equivalent to 107 times the per-share earnings that analysts expect Netflix to make this year. This price-to-earnings ratio is far higher than it is on the stocks of many other technology companies. Bullish investors may contend that such a ratio is justifiable, given that analysts expect Netflix’s earnings to keep growing quickly. Profits are expected to rise 58 percent this year, and 66 percent next.

But the subscriber growth fell short at what could turn out to be a challenging time for Netflix. It is facing competition from Amazon, Hulu, Google and, perhaps, Apple. The Walt Disney Co. is buying much of Fox, in part, to bolster its planned streaming service. And, of course, AT&T has big ambitions for Time Warner, which it is acquiring for its video content. Big hit shows, like “House of Cards” and “Stranger Things,” helped Netflix attract new subscribers. The more companies striving to produce blockbusters, the harder it may become for Netflix to maintain the pace of its subscriber growth.

And in a drawn-out fight, in which everyone is spending large sums on programming, investors may find it harder to overlook Netflix’s negative cash flows. The company made $674 million in the first half of this year. But its operations used up $755 million of cash during that period.