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Netflix Is Growing, but Don't Ask by How Much

Phil Harvey
7/16/2018
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Netflix's letter to shareholders was a fairly neutral retelling of its quarterly results, but it was not a blockbuster.

"We had a strong but not stellar Q2, ending with 130 million memberships," the company said in its unsigned shareholder letter. "Membership growth was 5.2m, the same as Q2 last year, but lower than our 6.2m forecast. Earnings, margins, and revenue were all in-line with forecast and way up from prior year."

The Internet video provider missed its own forecast for net subscriber growth for the first time in over a year and investors reacted immediately. After Netflix shares were up $4.68 (1.18%) to $400.48 in normal trading, the stock took a $56.99 (14.23%) dive to $343.49 in after-hours trading.

Netflix CFO David Wells, on the company's video earnings interview, acknowledged the forecasting gaffe but said that the business is still healthy. "We think based on the rolling 12 months of growth we've had... that the background and underlying characteristics of the business haven't changed, the total addressable market is intact and hasn't really changed."

The company is adding more paid subscribers and "the fundamentals have never been stronger," said Netflix CEO Reed Hastings.

For next quarter, Netflix is again forecasting growth. "For Q3, we forecast global net adds of 5.0m (compared with 5.3m in Q3'17), with 0.65m and 4.35m in the US and international segment, respectively. Paid net adds are forecast to be 5.2m, up from 5.0m in Q3'17," the company wrote in its investor letter.

As AT&T and other telcos look to own and control more content and as Disney and other content creators launch competing Internet-based video services, Netflix will need to stay to the course in producing its own shows -- and lots of them. To date, that content investment has paid off in terms of industry recognition as Netflix recently netted 112 Emmy award nominations spread across 40 different scripted and unscripted shows.

— Phil Harvey, US News Editor, Light Reading

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Phil_Britt
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Phil_Britt,
User Rank: Light Sabre
7/23/2018 | 2:51:35 PM
Re: Final frontiers
It's taking a while, but at some time laws of numbers, debt, etc. have to catch up to Netflix. While it likely has a better cushion (dedicated subscribers) than many others, at some point the debt will need to slow down.
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
7/17/2018 | 11:41:17 AM
Re: Final frontiers
Yeah, that's going to be a big deal when they have slowing growth and mounting debt as they take on foreign markets.

They'll need to pay a dividend, perhaps, and really sell investors on the idea that what they have simply can't be found anywhere else. Be more HBO than HBO. 

I would not be surprised if they started buying foreign studios with content assets just to speed up the process of global expansion.

Netflix has only bought one company to date, a small comic book publisher -- http://www.millarworld.tv/movies.

There are a lot of indie and midsized studios that have reasonably sized content libraries that Netflix could chase in India, China and elsewhere.

Not sure if that's top of mind, but each quarter the execs continue to say that they're "open" to more acquisitions.

-ph
mendyk
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mendyk,
User Rank: Light Sabre
7/17/2018 | 11:30:08 AM
Re: Final frontiers
Agree -- one question is how big the debt pile will grow as it tries to gain dominance in those Asian markets. If subscriber growth does level off (which is inevitable at some point), then "investor" attention will turn to other health indicators, like debt levels and profit margins.
Phil Harvey
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Phil Harvey,
User Rank: Light Sabre
7/17/2018 | 10:51:19 AM
Re: Final frontiers
If they stick to their guns about not becoming a generic, stream everything company, the only play for them (assuming market saturation in the developed world) is to become a hit-making machine in India, China and the U.S.

They've done a good job in the U.S. Those other two markets will be more challenging but I think they stand a better chance of pulling it off than Amazon or AT&T.
mendyk
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mendyk,
User Rank: Light Sabre
7/17/2018 | 9:48:24 AM
Final frontiers
The Stans are still a greenfield opportunity for Netflix. And the two Mongolias. And our new friends in North Korea. So no need to panic or do something drastic like make your service profitable.
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