Netflix's (NFLX) most recent quarter looks as though we're watching a rerun, with some analysts growing weary of the recurring disappointments by CEO Reed Hastings to pull in new subscribers.
As Hastings made clear at the annual Consumer Electronics Show this January, Netflix's future is all about "going global," by accumulating international content licenses and rolling out new programs in just about every country except China. But with disappointments in subscription forecasts on Netflix's first and second quarter earnings calls, some analysts no longer share Hastings' enthusiasm, and shareholders fled the stock Tuesday.
Shares of the streaming-media company were down 14% in midday trading to about $85, with the familiar culprit being underwhelming subscription growth in Netflix's Monday earnings report, a metric which similarly pulled down shares by about 10% in the company's April earnings showcase. After all, Netflix's adjusted earnings of $0.19 a share for the quarter more than doubled analyst forecasts, while sales of $2.1 billion fell roughly in line.
But Netflix missed its 2.5 million subscription target by 33% for the quarter, following a disappointing first quarter in which Hastings first cut his second-quarter subscription forecast, largely citing weak product launching in Australia and New Zealand. But some analysts are growing tired of excuses, and expressed concerns Tuesday of a more fundamental decline in popularity of the on-demand giant's programming.
"We question when investors will grow tired of Netflix's claims that 'the dog ate my homework,'" analysts with Wedbush said in a Tuesday research report, reaffirming their Underperform rating. Last year, Netflix blamed a consumer shift to chip-based credit cards; last quarter it was the Australia-New Zealand roll-out; and this quarter it appears to be negative press surrounding Netflix's so-called "un-grandfathering" of its price increases, the analysts said. (Un-grandfathering refers to the departure of agreements in previously established membership plans.)
"Next quarter, the Olympics will also be a drain," the Wedbush analysts added. "We can only surmise that in fourth quarter, the election will be a drain."
Meanwhile, Real Money's Jim Cramer said in a Tuesday article that the un-grandfathering of subscribers had more of a profound effect on re-signing U.S. members than Netflix or Wall Street had anticipated.
"Price has not mattered before this quarter," Cramer said. "Netflix was part of the holy trinity of memberships we will pay more for, along with Action Alerts PLUS holding Costco (COST) and Growth Seeker holding Amazon (AMZN) Prime. That's no longer the case." (Of the 1.7 million new members Netflix managed to add in the second quarter, only 160,000 were domestic additions.)
"In other words, it seemed as if fear of a pending price increase is what made U.S. numbers so weak," Cramer said. "I found myself thinking, at least they didn't lose any."
And weaker guidance for the third quarter prompted BMO Capital Markets analysts Daniel Salmon and Ygal Arounian to cut Netflix's price target to $85 from $115 on Tuesday. On Netflix's earnings call with analysts, third-quarter subscription guidance was cut to 300,000 for new U.S. members from 774,0000, and to 2 million new members internationally, from previous guidance of 2.85 million.
"While subscriber growth is coming in slower than we initially expected -- and we tick down our multiple to reflect that -- we still believe a premium is deserved owing to a disruptive model, faster revenue growth, and the still meaningful international opportunity ahead," Salmon and Arounian added.
This story has been updated to reflect that Netflix's first quarter did not miss subscription estimates, but the company instead lowered subscription forecasts.
- For a technical view of Netflix: Where Does Netflix Go From Here?