Netflix chart

Netflix Inc. (NFLX UW), the video-streaming giant, posted Q2 results yesterday. This followed the U.S. close with stock down over 14% in after-hours trading to investor disappointment. Although the financials were mixed on the whole with a slight miss on revenue ($3.91Bn vs $3.94Bn estimated) and a beat on earnings per share (85 cents vs a 79 cent estimate), it was the subscriber growth which really hit sentiment.

The company added 5.2 million new users over the quarter, approximately a million short of predictions, while it expected to only add 5 million customers over the coming period which would be a slow down on the previous year. The fall in the stock might indicate that fundamentals may be proving a slight headwind for Netflix – a spiralling (upwards) cost of content (and associated cash burn), a lack of hit original releases and on top of that, competition intensifying within the streaming space from the likes of Disney (DIS UN) and Amazon (AMZN UW) – with the latter two undoubtedly contributing to disappointing customer growth.

The magnitude of the after-hours fall however could also have been affected by a perceived frothiness in valuation, indeed investors have seen a return of over 100% YTD which is nothing short of remarkable and a ringing endorsement for Netflix’s potential going forward. The board will now be looking to realise this potential and with international sales surpassing U.S. sales for the first time, they’ll likely be looking to leverage this consumer base. We’ve also seen the company experiment with their pricing model in recent times, offering a more premium service and attempting to refine the user experience.

 A release like this is always going to cause jitters among investors from a company that’s spent so heavily on content in order to boost its subscriber numbers – the question for investors is whether this is a blip or something more structural within the video-sharing landscape?

Joshua Owen,

Trader

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