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Netflix Inc. (NFLX) Losing Eye-balls to Olympics But There’s a Bigger Problem

Netflix Inc (NASDAQ:NFLX)

Millions of people across the globe are excited that the Olympics has begun but Netflix Inc. investors aren’t particularly happy about about them. The Olympics games are underway in Rio de Janeiro, Brazil and millions of viewers in the U.S. will be tuning in their TVs, smartphones, and tablets to catch some live action. The problem however is that many of those viewers will be cutting back on binge watching sessions on Netflix to follow watch their favorite Olympic team or athlete in the games.

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Netflix is losing viewers to the Olympics

The Olympic Games is an event that draws people to their screens as nationalistic prides take over in the hearts of viewers. Paul Verna, senior analyst at eMarketer observed that Live TV tends to see an upsurge in demand while video streaming and traditional TV programming tends to lose their viewers. In his words, “Live TV in this particular incarnation, which is a mega sports event, is still the one domain of linear TV that seems to thrive”.

Interestingly, Netflix had forewarned investors that the Olympics would have an adverse effect on its subscriber numbers in the third quarter. In the second quarter earnings call, the firm’s executives made room for the Olympics in the guidance. David Well, the firm’s CFO noted that “So with an assumption of a hit from the Olympics which largely affects us in the past on gross adds, or on new subscribers coming in, that’s going to affect in terms of a year-over-year trend.”

Interestingly, the CFO was more direct about the impact that the Olympics will have on Netflix outlook. He says, “we expect that to be a meaningful — a small but still meaningful — impact on the quarter. Negative impact.”

Netflix’s Olympics headwinds point to a much deeper problem

On the surface level, investors shouldn’t be worried about the low subscription rates at the firm during the third quarter – after all, the firm has forewarned that the Olympics will have an adverse effect on user numbers. However, Michael Goodman, director of digital media strategy at Strategy Analytics thinks that the reduction in Netflix’s sub numbers during the Olympics is an indication of a much bigger problem.

Goodman noted that the firm didn’t record low subscriber numbers during the last World Cup and that it is not logical the 2-week long Olympics will affect subscriber number throughout the quarter. Goodman says, “They’re trying to give reasons why their subscription rates are down, and they’re not reaching the same rates… The answer to me is simple: Especially in the U.S., they’re reaching saturation. It’s a flat-out numbers game, and they’re on the backside.”

Investors lean towards the bearish bias on Netflix

The chart above shows how the shares of Netflix have traded in the last year-to-date period (Blue). The chart also shows its Short interest (Orange) and it shows its Percent of Float Short (Red). From the chart above, you’ll observe that the shares of Netflix are down 17.6% in the year-to-date period. Netflix is attracting short sellers even though the chart above suggests that its short interest and Percent of Float short are falling.

In July, the shares of Netflix tanked after the firm reported worse than expected second quarter earnings. Interestingly, the weakness in the share price benefited short sellers  and Ihor Dusaniwsky of S3 Partners observed that ” “With the stock down 15% in aftermarket trading, short sellers have made almost half a billion dollars“.

Now, Netflix has started to show signs that the third quarter earnings will also be disappoint and the bears are circling around, waiting to move in for the kill.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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