Netflix Inc. (NFLX), once a star technology stock during the decade-long bull market, has gone nowhere in the first nine months of 2019 as the company gets set to report third-quarter earnings on October 16 after the close of trading.
While analysts expect rising earnings during the period, the company remains the largest short in the movies and entertainment sectors with short interest of $6.2 billion, according to S3 Partners. Shares of the video-streaming company are still 35% below the all-time high reached last year. Much of the year’s weak performance came in mid-July as investors dumped the stock after a second quarter earnings report showed a decline in domestic subscribers.
What Netflix Investors Are Watching For
It was the first such decline that Netflix had posted in nearly a decade and was certainly not in line with the subscriber additions that analysts were expecting. While the company saw an increase in overall memberships due to an increase in international streaming memberships, the growth in overall memberships slowed, a sign that the new streaming wars are already beginning to pose a threat.
While slowing growth and a decline in domestic subscribers is bad enough, the cost of providing content is also rising. Investors will be looking for evidence in the upcoming earnings report that Netflix still has some growth potential in what appears to be an increasingly competitive video-streaming market.
Analysts’ Q3 Estimates
Netflix’s third-quarter earnings per share (EPS) is expected to have grown 16.9% from the same period a year ago, according to average analyst estimates gathered by Yahoo! Finance. In the last four quarterly earnings reports, actual earnings have come in above analyst estimates. Analysts forecast revenue to have grown by 31.3% from the year-ago period, and Netflix predicted that it would post 21.6% year-over-year growth in total paid subscribers.
While the company’s second-quarter earnings came in above estimates, those earnings showed a 29.4% decline from $0.85 per share to $0.60 per share. Second-quarter revenue came in at $4.92 billion, slightly below analyst estimates of $4.93 billion. While revenue growth of 26.0% came in above the 22.2% growth posted in the first quarter, it was much lower than the 40.3% posted in the second quarter of 2018 and shows a definite downward trend over the past four quarters.
Slowing Subscriber Growth
The slowdown in revenue growth is definitely worrisome, but it was the decline in domestic subscribers that really caught investors’ attention. Netflix reported 126,000 less paid memberships for domestic streaming at the end of the second quarter compared to the end of the first quarter. Analysts had been expecting as many as 352,000 domestic subscription additions, according to Barron’s.
Including international memberships, Netflix added a total of 2.7 million streaming memberships, well below the 5.5 billion additions posted in the second quarter of 2018 and below the 5.0 million the company had forecasted. While total subscriptions for streaming content still grew by 21.9%, that growth was markedly lower than the year-over-year growth of between 25% and 26% posted in the previous four quarters.
Staying Competitive Amid the New Streaming Wars
Netflix is still the dominant provider of video-streaming content with 60.1 million domestic subscribers and 91.5 million international. However, the slowing growth may be just an initial warning sign that competition is starting to heat up. A number of other streaming services are preparing to enter the market, with both The Walt Disney Company (DIS) and Apple Inc. (AAPL) set to launch their platforms in November.
“While we’ve been competing with many people in the last decade, it’s a whole new world starting in November,” said Netflix CEO Reed Hastings at the recent Royal Television Society conference, per Barron’s. “It’ll be tough competition.”
Netflix will be forced more than ever to provide high-quality content if it wants to attract and retain subscribers. The arrival of new entrants already means the company will be losing its rights to stream its two most-watched shows, “The Office” and “Friends.” NBCUniversal will be taking back “The Office” to stream on its own platform beginning in 2021, while “Friends” will no longer be available on Netflix at the end of this year and will be launching on WarnerMedia’s HBO Max sometime next year.
With competition ramping up, investors will want to see if Netflix can still post solid subscriber and revenue growth. The company expects to see year-over-year subscription growth of 21.6% for the third quarter, and anything less will likely cause investors to assume the company’s management is not as prepared as it thinks for the streaming wars that are only going to get more intense in the coming years.