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Netflix Scores Own Goal On Subscriber Growth

Stock valuations are stretched, especially for tech major and megamajors and doubters are just waiting for some bad news did Netflix provide an instalment by underperforming in the June quarter - a self-imposed stumble and an example of managerial hubris.

So the question now for the next few months is whether we have seen the start of the end of the great Wall Street tech rally?

Netflix shares slumped 14% after it delivered a weak (by its standards) quarterly subscriptions that the company acknowledged rather than ignored (as tech companies do when revealing underperformance)?

The company revealed that instead of adding the 6.2 million new subscribers it had forecast in April, a total of 5.2 million were signed up.

Normally that would be solid news (much of the rest of the report was solid), but because it was a million short of forecast, down went the shares, wiping more than $US26 billion from the company’s market value in after hours trading.

That raised questions about the sustainability of the tech share rally (really the giant tech share rally - Netflix, Amazon, Apple, Facebook, Alphabet (Google) and Microsoft).

Quarterly results from Microsoft later this weak will now be watched more closely for any signs of a slowdown in its strong growth of the past couple of years.

The quarterly results from Facebook, Apple and especially Amazon in the next fortnight though will hold the key - any signs of a stumble and investors will head for the hills.

Investors ignored good news from Netflix (https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2018/q2/FINAL-Q2-18-Shareholder-Letter.pdf) about profits - the company reported a profit of $US384 million, up from $US66 million in the same quarter a year ago.

Revenue rose 40% to $US3.907 billion from $US2.785 billion the year before. Normally those metrics would have sparked a price surge. But the company ‘only’ added 4.47 million international subscribers and 670,000 domestic subscribers, missing its April estimates of 5.9 million and 1.2 million by a margin wide enough to spark a sell-off.

That was the worst subscriber performance for two years and to add further concern, the company hauled back on the optimism and sees itself adding 5 million subscribers this year, down on the 5.3 million a year ago.

By September 30 it expects to have 135.1 million subscribers in the US and internationally - 650,000 in the US, to 58.658 million, 4.35 million internationally, to 77.11 million.

By these figures, the US is now run out of momentum and the increase predicted for this quarter is just over 1%, while internationally it will be 6% (down from 8%).

This is where the company’s future growth will come from and it is increasingly likely that in the next year or so Netflix could see a small fall in US domestic subscriptions, or a static quarter or two of no growth at all.

Those increases are not of a size to support the sort of share price growth we have seen from Netflix this year (109% up to the close on Monday).

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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