The video streaming giant, Netflix saw a 5% plunge in its stock price on July 17, 2018 (post initial fall of 10-12%) with the release of its quarterly update that entailed a slower subscriber growth rate. Netflix has been rallying in the past, but the quarter 2 of 2018 results were not in line with the previous results. In terms of subscribers, the total number of US net adds were 0.7 million which was not close to the guided 1.2 million by Netflix and international net adds were up 4.47 million which was forecasted as 5.0 million. Other than the off guidance and missing the estimates, the problem for Netflix comes from the different subscriber’s margins of contribution. The major subscription inflow of Netflix comes from its international markets. However, its contribution margins from its international segment are materially lower at 15.5% compared to 39.1% which is the problem for Netflix stock markets. In other words, US subscribers are worth 2.5 times more than the international subscriber. Thus, not only the slowdown is substantial but meaningfully Q3 2018 is expected to come down year-on-year. For third quarter it was earlier predicted that there will be around $135.1 million members by the end of September.
However, Netflix’s revenues have been broadly in line with expectations at $3.9bn, thanks to the recent price hike and forex fluctuations and so was net income of $384 million. It has been forecasted that the revenues will rise to $4.0 billion a little less than the Wall Street’s consensus of $4.1 billion in the next quarter, while net income would dip to $307 million.
Free cash flow for Q2 2018, at the same period a year ago was $608 million while in this period it was negative $559 million, and the issue is that Netflix still expects to burn cash flow of between $3 billion to $4 billion for FY18. Netflix’s cash balance will end FY 2018 with $1.8 billion, in the best-case scenario if Netflix is conservative. However, more realistically it may end at a lower figure of $1.5 billion.
Some of Netflix’s peers are in comparison cheaply traded and Netflix is the only player which does not generate any significant cash. To keep attracting and retaining subscribers it must invest in more new films and TV shows, especially as it is facing huge competition from Walt…
Overuse of the Netflix service from locked down consumers, coupled with limited new programming being produced during the pandemic has made Netflix less attractive in the short term. Consumers now enjoying being out of the home again, have switched off their subscriptions. This will change in the winter, when the colder weather kicks in and a glut of new content is made available from resumed projects. Silly not to buy a market leader at this price?
