The Netflix share price plunged in after-hours trade last night, after the company disappointed on subscriber growth numbers.
It has always been well understood that the growth in online streaming is primarily driven by growth in these numbers, as well as the addition of new online content. Netflix has been at the forefront of that, investing heavily at a rate faster than it is able to add these new subscribers.
While its subscriber base continued to show signs of solid growth, investors appeared content to ignore the mismatch between the money going out in terms of creating new content, and the money coming back in terms of monthly subscriptions.
Q2 revenue up but subscriber numbers miss target
To deal with this, Netflix has been increasing prices to help compensate, and last night's numbers did show a rise in profit, while revenue rose 26% year-over-year to $4.92bn. So far so good, however the latest quarter showed a sharp miss in subscriber growth, with the US seeing a loss of 126,000 subscribers against an expected gain of 352,000. More worryingly, international subscriber growth slowed to 2.83m new subscribers, which on the face of it looks good, however it fell well short of expectations of 4.81m.
This miss has raised many questions, mainly over whether the upcoming content war is starting to see a slowing in this particular area, as consumers mull over a growing number of different options at a time when Netflix needs to raise prices to fund its ability to add new content.
Netflix share price expected to fall sharply
While management have suggested that the company's really successful Q1 may well have caused some pull forward from this quarter, and that the addition of new content, including 'Stranger Things 3' and a new series of 'The Crown', will see subscriber growth pick up again. To highlight that confidence, Netflix have said they expect to add 7m new subscribers for Q3, which is quite a high bar. In the short term, investors may well not be so forgiving when US markets open later today, when Netflix's share price is expected to open sharply lower.
Time will tell whether this quarter is a temporary blip, or whether having reached well over 150m total subscribers, Netflix's ability to add new users at the same growth levels as previous quarters has run its course, given the growth of competition in this space. Stranger things have happened.