Netflix (NFLX) stock's deep drop on Thursday is hard to watch for investors.
The shares slumped double digits on the open, marking the biggest percentage decline since 2016 and the largest fall in absolute dollar terms that the stock has ever seen. The open leaves NFLX at its lowest level since January.
While the headline numbers for Netflix's second quarter were mixed, the metric moving the market seems to be the sagging subscriber base that foments fears of the coming loss of key licenses, and entry of key competitors such as Disney (DIS) , AT&T (T) , Comcast (CMCSA) , CBS (CBS) , and many more.
Netflix said its U.S. subscriber base fell by 126,000, the first quarterly decline in eight years, while it added just 2.83 million global customers, just over half of what was expected by analysts on Wall Street after an exceptional first-quarter result.
Management largely eschewed the idea that competition from content competitors was to blame, instead pinning the blame for the disappointing numbers on pricing and seasonal trends.
"Our missed forecast was across all regions, but slightly more so in regions with price increases," a company statement reads. "We don't believe competition was a factor since there wasn't a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions."
"We think the primary story was around seasonality and timing and nature of our content slate, but pricing played a factor," CFO Spencer Neumann added, elaborating on the results for analysts.
Looking into the third quarter, Netflix said it expects revenues of $5.25 billion, with global streaming paid additions of 7 million, but noted that "fierce" competition is more likely to bear on results moving forward.
"Over the next 12 months, Disney, Apple (AAPL) , WarnerMedia, NBCU and others are joining Hulu, Amazon (AMZN) , BBC, Hotstar, [Alphabet (GOOGL) ] YouTube, Netflix, and many others in offering streaming entertainment," a statement notes. "The competition for winning consumers' relaxation time is fierce for all companies and great for consumers."
The commentary does not do much to inspire confidence after a miss of this impact, but management stressed that the coming competition need not be a zero-sum game.
"We believe explanations for the current quarter miss appear reasonable, though with a likely louder market narrative around competition leading up to the November 12th Disney+ launch in the U.S., Netflix shares may be range bound until the next meaningful catalyst," Stifel analyst Scott Devitt said. "Netflix will have to prove, as it has done many times, that its value proposition remains one of the best on the net."
Despite some confidence that Netflix can keep its ad averse platform performing, the forecast of months of languishing ahead is less than enticing, likely helping add pain in the near term.
No Chill in the Cash Burn
For longer-term investors, the company's continued reliance on high-yield debt as it promotes its ability to produce blockbuster content remains a lingering issue. The company projects a free cash flow deficit for the full year to tally negative $3.5 billion with a curbed cash burn not expected until next year.
"In the meantime, our plan is still to use high-yield debt to fund our content investments as we did in April," the company's release notes. "In our most recent round, we raised 10.5 year senior notes of €1.2 billion (3.875% coupon) and $900 million (5.375%coupon)."
The coming competition might make the company's forecast of improvement in free cash flow in 2020 overly optimistic as further investment in content is likely to curtail any other cost cuts. Additionally, as networks claw back some of the platforms most popular programs, like Friends and The Office, the necessity of content spend becomes only more pronounced.
"Netflix continues to spend on content and expansion, which is basically cannibalizing anything it does on the income statement," Real Money contributor David Butler noted. "For a long time, that was okay, as investors believed that the long game would justify it all. But, as user growth slows, and the competition mounts, I think we're going to see more pressure."
For more in depth analysis of the quarterly crash for the FANG name, check out Eric Jhonsa's review of the release and 10 Key Takeaways.