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Netflix, Inc. (NFLX): Why Are investors Freaking Out?

Netflix Inc (NASDAQ:NFLX)

Netflix, Inc. (NASDAQ:NFLX)’s shares have declined by around 15% after-hours trading on Monday after the video streaming giant posted lower than expected subscriber numbers for the Q2. The streaming giant was estimating 2.5 million users worldwide at the end of the quarter, but it reported only 1.7 million users. In net terms, the video streaming service added around 160,000 million users in the US, but it was predicting a gain of 500,000 million users.

Netflix, Inc. (NASDAQ:NFLX)

Grandfathering policy to blame

In a letter to the shareholders, the streaming giant said the gross additions were on target. The streaming giant attributed the lackluster results to the number of subscribers who canceled their service amid price increases. A “grandfathering policy” is in the process of being phased out, which means that longtime Netflix, Inc. (NASDAQ:NFLX) subscribers, who have been enjoying the old pricing of $7.99 a month will be moved to $9.99 for the cheaper HD package.

The letter further reads that “Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with the press coverage in early April of our plan to un­grandfather longer tenured members and remained elevated through the quarter.” “Churn” is a term to describe the number of users, who canceled their service.

In the letter, the streaming service said that un­grandfathering will provide them with more revenue to invest in their content, and drive long-term growth even when un­grandfathering and associated media coverage may moderate near­-term membership growth. Netflix expects to conclude the un-grandfathering over the second half of this year.

Netflix underestimated price elasticity of users

For the quarter, the streaming service posted earnings per share of 5 cents on revenue of $1.97 billion. The video-streaming giant was expected to post earnings of 2 cents per share, around 66% down from the 6 cents per share it earned in the last year period. Analysts expected the revenue to rise 28.4% to $2.11 billion.

K C Ma, professor of finance at Stetson University, says they are more concerned as Q3 subscribers guidance of 2.3 million, is much lower than the street’s estimates of 774,000 U.S. and 2.85 million international subscribers. In the third-quarter, the video streaming firm expects to add slightly more than 300,000 U.S. subscribers.

“It appears that NFLX has hit a wall of higher pricing and underestimate the price elasticity of their users,” the professor says.

For both the Netflix, Inc. (NASDAQ:NFLX) and its stock, this year is a pivotal year as the streaming giant is trying to execute on its global expansion plans. The streaming service moved into 130 new countries in January alone, and investors view international growth as the key to sustained growth as the U.S. market saturates.

In pre-market trading today, Netflix shares were down almost 13%. Year to date, the stock is down over 15% while in the last one-year, it is down almost 14%.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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