Netflix stock may seem like it’d be an A+ bet to bring in money for those who own shares, but, unfortunately, the streaming service is starting to see its price drop due to a number of different factors. One of the most prominent? Rising competition from places like Hulu, Roku and YouTube TV, among others, which has led to fewer new memberships for Netflix.
Arguably the premier destination for video streaming and original TV shows, Netflix stock dropped 14 percent in after-hours trading on Monday, which is a direct effect of a second quarter with less memberships. While the company did report 130.1 million subscribers worldwide by the end of this second quarter, per the L.A. Times, that number fell short of the expectation of 130.8 million by analysts. New membership matched last year’s second quarter showing — 5.2 million during the period — but was less than the 6.2 million forecasted, causing the stock to drop.
According to Michael Pachter, managing director of equity research at Wedbush Securities, because of the slow growth of the Netflix stock because of rising competition and, possibly, user fatigue, he actually has an “underperform” rating on Netflix stock, per the aforementioned L.A. Times story.
“Most bulls thought that [Netflix] could grow to 85 million domestic subscribers, but the slowing growth might suggest that the ceiling is closer to 70 million. That means less upside and less growth, which impacted the share price,” said Michael Pachter, managing director of equity research at Wedbush Securities. He has an “underperform” rating on Netflix stock.
Although Netflix stock dropped following a disappointing quarter which saw missed projections, overseas subscriptions continue to be strong for the company. Per the L.A. Times, Netflix saw 4.5 million new additions to the streaming service, which was an 8 percent increase, year over year. And, while the decrease in Netflix stock is a bit surprising, the company still managed to beat earnings expectations for the quarter, which ended June 30, reporting earnings of $384 million — or 85 cents a share — which is up from $66 million — or 15 cents — from a year prior.
So, is the drop in price of Netflix stock something to be wary of, or just a some sample size that’s occurring due to the spring and summer seasons — which, naturally, see less users due to other activities. Well, for the year, Netflix shares have nearly doubled in value, breaking the $400 mark for the first time in June, so, for now, it seems to be the exception more than the rule.
That said, in a letter to its shareholders, Netflix is keenly aware of the increased competition, saying that it had a “strong but not stellar” quarter, then continued to reference pressure from competitors like the proposed merger between Disney and 20th Century FOX, as well as the merger of Time Warner and AT&T. It’s because of that increased competition that experts in the industry believe Netflix stock has dramatically dropped this past quarter, per the L.A. Times piece.
“This isn’t entirely surprising given rising competition in the video streaming market, where Amazon, Hulu, HBO and others are gaining share of subscription video dollars at Netflix’s expense,” Paul Verna, principal analyst at EMarketer, said in a statement.
But in the long run, Netflix still looks poised to beat the competition. “Netflix has a strong slate of original content that should keep it in the forefront among streaming services,” Verna said.
Another contributing factor of a lackluster second quarter could have been the decline in new original content from Netflix. Although the L.A. Times reports the company will spend $12-13 billion on new content this year, that number hasn’t been reflected yet, meaning the rest of the year should help get the Netflix stock back to where most believe it should be. At least, that’s according to David Wells, Netflix CFO.
“I think we’re still on track for a strong growth year … and maybe it’s going to come in a little bit differently than we expected and others expected,” Netflix Chief Financial Officer David Wells said in an investor video interview Monday.
While the stock market is always a gamble, we’ve got a feeling the Netflix stock will recover as the year moves along. But, for the time being, the news of the 14 percent drop in price is a bit shocking.
Lead image via Getty
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