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Netflix shares plunge in after-hours trade after forecast miss

It said shows such as 13 Reasons Why had proved popular with viewers - Netflix
It said shows such as 13 Reasons Why had proved popular with viewers - Netflix

Shares in Netflix plunged by more than 14pc in after-hours trading, after it missed analyst expectations for subscriber growth by more than one million users, in what it called a "strong but not stellar" quarter.

The streaming company said it had added 5.2 million subscribers in the three months to June 30, below analyst forecasts for 6.3 million subscribers and its own expectations.

Netflix said: "This second quarter, we over-forecasted global net additions which amounted to 5.2m vs. a forecast of 6.2m and flat compared to Q2 a year ago, as acquisition growth was slightly lower than we projected."

The figures came as a nasty surprise for investors after a run of solid results, which had seen shares more than double in value in the year-to-date and had meant it had been the second best performer on the S&P 500 this year.

It had surpassed Disney as the most valuable media company in the world in late May, despite its revenue coming in well below that of the media titan, but in post-market trading slipped back below the both Disney and Comcast. 

UK households
UK households

The plunge in its value after the closing bell on Monday follows a warning from Stifel last week that its shares had priced in above-consensus near-term results. News of the forecast miss dragged down other tech stocks in after-hours trading, with Facebook, Amazon, Google and Apple all slipping.

Netflix has come under increasing pressure in recent months to continue its rampant growth, as investors expect it to be able to attract vast swathes of new users each quarter.

Analysts at UBS had warned that in its mature markets, namely the US, Canada and the UK, competition from Amazon Prime and Hulu had been growing over the past few years, and that subscriber growth in those regions appeared to be plateauing. 

Netflix had spent more than $1bn (£760m) on marketing in the first six months of 2018, almost double the amount it spent a year earlier, but despite that still missed expectations for subscriber numbers in both the US and its international division.

Netflix international expansion
Netflix international expansion

"As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy, meaning in some quarters we will be high and other quarters low relative to our guidance," the company said. 

Netflix is now forecasting global net adds of 5 million users in the third quarter, compared to 5.3 million for the same period last year.

Speaking on an analyst call after the results, chief financial officer David Wells said: "We think based on the rolling 12 months of growth that we've had compared to the prior 12 months of growth – the US up slightly, internationally up significantly – that the background and underlying characteristics haven't changed."

He said the majority of the marketing spend was orientated around building "title brands", and said Netflix was still learning what the most efficient mechanism was to market those titles. 

GBH Insight analyst Daniel Ives said that the "international miss was most concerning given this is the linchpin to the core growth thesis for the coming years". However, he remained bullish on the stock, saying while this is a "near-term gut punch" for the company, the weakness in its share price makes for a good buying opportunity.

Netflix's revenue came in at $3.9bn for the period, up 40pc year-on-year, while its operating income increased 12pc to $462m, thanks to an increase in the price of its subscriptions. 

It said it expected to post free cash flow of between negative $3bn and $4bn for the full year, as it spends heavily on original content – an area it has honed in on in recent years to ward off competition from its fellow internet giants.

At a glance | Netflix price changes
At a glance | Netflix price changes

In the most recent quarter, it said films including the Kissing Booth and series such as 13 Reasons Why had proved particularly successful. 

Last quarter Netflix said it was likely to spend between $7.5bn to $8bn on content this year, although some had speculated that it could spend up to $13bn, and Netflix gave no update on this in its second quarter results. 

It did, however, say it was expecting to see more competition from media conglomerates, as they pursue tie-ups, such as AT&T and Time Warner, and either Fox and Disney or Fox and Comcast, depending on which company triumphs in the ongoing bidding war.

Chief executive Reed Hastings said: "There's a lot of new and strengthening competition, with Disney entering the market, HBO getting additional funding, the different French broadcasters coming together, so that's all normal and expected.

"It is what it is, and we're not going to be able to change it, and our focus is on doing the best content we've ever done, having the best user interface, the best recommendations and the best marketing."