Analysts Take Netflix Subscriber Growth Shortfall in Stride

While Netflix stock plunged after the company announced that its second-quarter subscriber growth was below expectations, analysts didn’t think it was The End of the F**king World for the high-flying streaming video service.

“Everybody knew the day would someday come when Netflix would fall short of quarterly subscriber expectations. It's been 5 quarters (actually, more like 8). Here is that day,” said Todd Juenger of Sanford C. Bernstein in a research note Tuesday.

Juenger and other analysts have seen Stranger Things in the stock market.

“For the high-conviction bulls, it only matters if 130 million subs versus 131 million subs shakes their long-term confidence. If their confidence remains intact, and they are not maxed out, here is a chance to accumulate a bigger position,” he said. "For those who wanted an entry point, here it is… unless the sub miss has shaken that confidence, which so often happens.”

“Frustrated bears may be enjoying some long-awaited schadenfreude, but unless one was short before the print, there's probably nothing to do now. Pressing a short (or underweight), betting against the winning service in a huge global market opportunity, is a brave move.”

To Juenger, the results didn’t dim the Glow for Netflix stock.” Despite the sub disappointment, we take our target price up (from $372 to $434),” he said.

Nor did Doug Mitchelson of Credit Suisse think that the earnings meant that Netflix’s business was a House of Cards.

“While this miss is disappointing, Netflix’s pace of growth could not accelerate at this scale much longer, and shifting to stable or slightly moderating net additions going forward had a relatively modest impact on our target price. We would suggest any pullback is an opportunity, given Netflix’s clear leadership in the fast growing global streaming market,” Mitchelson said.

Management offered fewer than 13 Reasons Why the sub numbers were such a disappointment.

“Acquisition which is up year-on-year, but wasn’t up as much as we thought it was going to be. So and it was pretty broad across multiple markets, it wasn’t even one area of the world,” said Netflix CFO David Wells during the company’s earnings video for analysts. “I think we're still on track for a strong growth year this year and maybe it's going to come in a little bit differently than we expected and others expected.”

“The fundamentals have never been stronger. Our viewing is setting year-over-year records that shows that we have come in, so we are feeling very strong about the business,” said CEO Reed Hastings.

“We've seen this movie of Q2 shortfall before about two years ago in 2016 and we never did find the explanation of that other than there is some lumpiness in the business and continued to perform after that,” Wells added.

Wall Street can be Insatiable, but even some analysts who are neutral on Netflix, thought the stock’s short-term decline would prove to be Atypical.

“Despite the first big miss on subscribers in a long time (2Q 2016 comes to mind), we can’t imagine that any views are changed by one anomalistic quarter when the path to global SVOD dominance is still so wide open,” said Michael Nathanson of MoffettNathanson Research.

I could be a while, however before everyone is convinced this isn’t the start of A Series of Unfortunate Events.

“Netflix is a terrific, customer-friendly service that over-delivers on value for money. Yet, we maintain our view that Netflix’s cash flow does not support today’s valuation because we assume that it will be more expensive for them to produce and market content than the Bulls think and the economics of the next 75 million international subscribers will be less efficient than the first 75 million international subscribers,” Nathanson said.

“We reiterate our Neutral rating but lower our target price by $3 to $223. We expect Netflix to be in the penalty box until at least the next earnings to determine if this was just a one-off miss or a start of something more. Even with the weak 2Q results and 3Q guidance, we remain on the sidelines due to valuation concerns.”

During the earnings call, Netflix execs had a bit of news to offer.

Ted Sarandos chief content officer, said that uber producer Shonda Rhimes was settling in at Netflix.

“We just physically moved Shonda into her new home here at Netflix and we're thrilled. She has a couple of shows particularly now that we can't announce yet, but we're really thrilled with the direction she's going,” Sarandos said.

Greg Peters, chief product officer, said Netflix was also introducing improvement to its TV user interface.

“We’ve been working really hard over the last several months and quarters even testing and researching, how do we make that TV experience faster, more fun, easier to find, the stories that our members will love and we’re actually going to roll some improvements out to that experience and make that better starting tomorrow,” Peters said. “So starting this week you’ll see those and that’s what we expect to be a long line of incremental improvements that make that experience even greater for finding the stories that you love.”

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.