Why Netflix (NFLX) Stock Is Crashing Today - Stocks in the News

Netflix (NFLX) was hit hard on Wednesday’s after-market and the pain is continuing on Thursday when it fell 22% after disappointing subscription growth numbers. Still, for the three months ending September 30, the online streaming company recorded revenues of $1.4 billion, a net income of $59.29 million and an EPS of 99 cents a share. 

According to consensus estimates, Netflix beat earnings by 5.49%, but investors saw the less than expected subscription report as an indicator of possible worry in the future.

In the third quarter, the company brought in an additional 3 million subscribers bringing Netflix’s total customer base to 53.1 million. CEO Reed Hastings says he expects to add 4 million more subscribers by the end of 2014 with 57 million global members. But he also acknowledged that the 3M number missed Wall Street expectations — and the company’s own forecasts too.

Less than Expected Subscription Growth

Netflix ended Q3 with 37.2 million total US members, which is short of the 37.6M it told Wall Street to expect. CEO Hastings stated:

“We added about a million new members in the US, ending Q3 with 37.22 million members, with lower net additions than our forecast and versus the prior year.”  

“We added two million members internationally, to end the quarter with 15.84 million members, with lower net adds than our forecast, but higher than prior year.”

The company is blaming the increase in prices as compared to a year ago which will eventually contribute to slower growth. In Q2 and early Q3, the impact of higher prices was analyzed to be offset by their new hit series Orange is the New Black. 

“This quarter we over-forecasted membership growth,” Hastings said, largely due to disappointing subscriber growth.

Driving Content Growth

Netflix is attempting to drive content growth for their online streaming library and is evident in the extra usage in FCF in Q3.  Their total content obligations increased to $8.9 billion in the quarter from $7.7 billion at the end of Q2.  The increase was driven by the multi-year commitments in Europe and continued expansion of original programming.

HBO Competition

Hastings stated that he acknowledged that HBO would be a core competitor in the long run, and addressed it again in their earnings report in a civil way.

“Starting back in 2011 we started saying that HBO would be our primary long-term competitor, particularly for content. The competition will drive us both to be better. It was inevitable and sensible that they would eventually offer their service as a standalone application. Many people will subscribe to both Netflix and HBO since we have different shows, so we think it is likely we both prosper as consumers move to Internet TV.”
 
Hastings’ main point is that while they have different programs, they both will be able to prosper and grow together.  It will be interesting to see how HBO reacts to this “treaty” if you will and see if they do anything to show signs of cooperation or at least not trending too far on each other’s turf.
 
Bottom Line
 
We currently rank Netflix as a Zacks Rank #3 (hold) and the company beat earnings estimates by 7.88% in the past year. The consensus estimate for the current quarter EPS is 93 cents per share and $3.87 for the current year.  In the past 60 days, a majority of analyst have downgraded their earnings estimates for the current quarter up to next year. 
 
This may be a ‘buy-the-dip’ opportunity so investors should be on the lookout for the next couple trading days to see how the impact of the less than expected subscription growth impacts the stock.  If it tells a significant story, then this may be a good metric for coming earnings reports to gauge future volatility of the stock price, and how NFLX can continue to grow in this more competitive environment.
 
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