Netflix, Inc. juggernaut may have finally slowed down. At least that’s what some analysts think. The streaming giant has been unstoppable for much of the past 10 years.
Until Wednesday, when the firm’s third-quarter user growth fell below estimates, prompting investors to punish the stock. Profits came in at $29 million for the quarter, missing analysts’ projections of $31 million. In the same period last year, net income totaled $59.3 million.
At the end of the quarter, the number of paid subscribers in the U.S. stood at 40.27 million, also lagging Street expectations of 42.51 million. Netflix is seeking to more than offset the slowdown in U.S. user growth with an aggressive international expansion program.
Given Netflix, Inc. ‘s sheer dominance on investor psyche over the past few years, it’s tempting to overlook one bad quarter. Bulls will be quick to point to this year’s 34 Emmy nominations for its original content. Add to that the mass following for House of Cards and Orange is the New Black. The good times will return soon.
Wedbush Securities’ Michael Pachter does not fall in this camp. In a note to clients, Pachter said that while management might have attributed the lower than expected revenue to “involuntary churn,” a “more plausible” explanation would be a churn driven by a combination of price increases and saturation.
Rivals are Closing In
Netflix, Inc. isn’t the only streaming to have this year received several Emmy nominations for its original content. Amazon.com, Inc. Prime went home with 5 Emmys for its hit show Transparent. Not only has Amazon clearly demonstrated that it too can create quality original programs, it is now cheaper than Netflix. After the new rate hike, Netflix annually costs $119 versus $99 for Amazon Prime.
“If anybody is so naïve to think Amazon isn’t going to exploit that and promote it, they’re crazy,” Pachter says.
Netflix has to Grapple with Rising Content Costs
If your business depends on content, and content costs rise, then it’s a big headache. A case in point is Netflix, Inc. recently opting out of its distribution deal with Epix. The Epix deal was lucrative. But Netflix just couldn’t come around to the price being asked.
Pachter estimates that Epix had asked for up to 50 percent more than the $1 billion that Netflix was already paying. “The risk is when everyone does that.”
Is the Stock Ripe for a Serious Correction?
Before it reported the latest quarterly results, Netflix, Inc. was trading at a mind-boggling P/E of 247! And the stock was up 125 percent year to date. No wonder, Netflix has to beat the law of large numbers to continue growing.
“Netflix has a tough row to hoe because of their own enormous success to date,” Jeff Kagan, a telecom analyst, says.
“The question is how can they keep up at this pace. Typically companies who do accelerate at such a pace, simply burn out after a while.”