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Netflix stock skids amid weaker-than-expected tally of new subscribers

Netflix stock skids amid weaker-than-expected tally of new subscribers
Netflix's domestic subscriber growth was particularly weak, suggesting that Netflix is seeing a dramatic slowdown in the U.S. (Elise Amendola / Associated Pres)

Netflix took an unexpected drubbing Monday on Wall Street amid signs that the company’s once torrid growth may be slowing as it faces rising competition.

The global streaming giant attracted fewer new subscribers than anticipated in the second quarter, causing its shares to tumble 14% in after-hours trading Monday.

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The Los Gatos, Calif., company said it ended the quarter with about 130.1 million subscribers worldwide, falling short of analysts’ expectations of 130.8 million for the period. It said it added 5.2 million members during the period — the same as last year’s quarter — but less than the 6.2 million it forecast.

Domestic subscriber growth was particularly weak, suggesting that Netflix is seeing a dramatic slowdown in the U.S. market. Netflix added 670,000 U.S. subscribers for the quarter, falling short of the expected 1.2 million that the company had forecast.

"Most bulls thought that [Netflix] could grow to 85 million domestic subscribers, but the slowing growth might suggest that the ceiling is closer to 70 million. That means less upside and less growth, which impacted the share price," said Michael Pachter, managing director of equity research at Wedbush Securities. He has an "underperform" rating on Netflix stock.

Overseas subscriptions continued to be a source of strength for Netflix. The company said it saw 4.5 million net additions, up 8% year over year.

The subscriber miss was a rare disappointment for Netflix, which has seen steady growth in new customers in recent quarters. New subscriptions are seen as a key metric for the company’s health since they are crucial to future cash flow.

Netflix still managed to beat earnings expectations for the three-month period that ended June 30. The company reported earnings of $384 million, or 85 cents a share, up from $66 million, or 15 cents, a year earlier. That exceeded the 79 cents a share estimated by analysts polled by Factset. Second-quarter revenue was $3.91 billion, which was slightly lower than the $3.94 billion predicted by analysts.

Shares of Netflix closed Monday at $400.48, up $4.48, or 1.2%. But in after-hours trading, the stock plummeted slightly more than 14% as investors reacted to the bad news.

For the year, Netflix shares have nearly doubled in value, breaking the $400 mark for the first time in June.

In a letter to shareholders, Netflix said it had a “strong but not stellar” quarter. It cited increased pressure from competitors, specifically the announced merger between Walt Disney Co. and 20th Century Fox, as well as the newly merged AT&T and Time Warner. The Disney deal with Fox hasn’t been finalized and faces a threat from a rival bid by Comcast.

Disney is planning to launch its own competing streaming service next year and to pull its movies from Netflix.

“We anticipate more competition from the combined AT&T/Warner Media, from the combined Fox/Disney or Fox/Comcast as well as from international players like Germany’s ProSieben and Salto in France,” the company said in the letter. “Our strategy is to simply keep improving, as we’ve been doing every year in the past.”

Industry experts also focused on the increased competition Netflix faces as a principal reason for the disappointing results.

“This isn’t entirely surprising given rising competition in the video streaming market, where Amazon, Hulu, HBO and others are gaining share of subscription video dollars at Netflix’s expense,” Paul Verna, principal analyst at EMarketer, said in a statement.

But in the long run, Netflix still looks poised to beat the competition. “Netflix has a strong slate of original content that should keep it in the forefront among streaming services,” Verna said.

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Netflix has forecast it will spend $7.5 billion to $8 billion on content this year, up from $6 billion in 2017. But the Economist, using data from a Goldman Sachs report, recently estimated that Netflix will spend $12 billion to $13 billion on content this year.

The second quarter saw little in the way of big new titles. Netflix premiered new seasons of “Marvel’s Luke Cage” and “Glow,” as well as the streaming releases of a few Disney movies, including “Coco,” “Thor: Ragnarok” and “Star Wars: The Last Jedi.”

Netflix also announced during the quarter a new partnership with Barack and Michelle Obama, in which the former first couple will produce TV shows and movies that will be available worldwide on the streaming platform.

Despite the negative investor reaction Monday, Netflix projected an optimistic outlook for the year.

"I think we're still on track for a strong growth year … and maybe it's going to come in a little bit differently than we expected and others expected," Netflix Chief Financial Officer David Wells said in an investor video interview Monday.

5:05 p.m.: This article was updated to include additional details from an analysts’ call.

This article was originally published at 1:40 p.m.

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