Netflix Reports Strong Subscriber Gains but Guidance Disappoints
Dominant video streaming service Netflix (NASDAQ: NFLX) reported second quarter earnings on Tuesday evening, and investors were not impressed. The company also announced a bold pivot into video games, which it plans to include in its subscription at no additional cost.
At the same time, Netflix is facing some tough year-over-year comparisons as subscriber growth in 2020 was supercharged by the COVID-19 pandemic.
Netflix shares have dipped by as much as 5% on Wednesday following the release.
How Netflix fared in Q2
Revenue in the second quarter increased 19% to $7.3 billion, which was mostly in-line with what Wall Street was expecting. That resulted in earnings per share of $2.97, missing the consensus estimate of $3.16 per share in profits.
Netflix added 1.5 million paid memberships in the second quarter, compared to its internal forecast of 1 million and the consensus estimate of 1.2 million. Growth is being driven by the Asia-Pacific (APAC) geographic segment, which represented roughly two-thirds of subscriber additions.
As its most mature market, North American memberships declined modestly in the second quarter. Netflix had increased prices in the United States late last year, while competition among major streaming providers is intensifying, so some churn can be expected.
The company notes that the crisis introduced greater volatility in reported results. “The pandemic has created unusual choppiness in our growth and distorts year-over-year comparisons as acquisition and engagement per member household spiked in the early months of COVID,” Netflix wrote in its letter to shareholders.
Investors may also have some concerns around the gaming strategy, which may prove to be a risky—and expensive—endeavor. Netflix has already experimented with interactive content, as some of its shows allow viewers to make choices that impact the narratives. The company says it views gaming as “another new content category,” and it will start by focusing on mobile games.
Yet, mobile gaming is intensely competitive and development can be costly. Netflix will have to cover those expenses and hope that games can boost engagement, attract more subscribers, or both, since it plans to include games at no additional cost. It’s a risky bet, but could potentially pay off.
A lackluster forecast
Investors are fretting over Netflix’s guidance, which came in below expectations. The company’s outlook calls for paid net additions of 3.5 million in the third quarter, while analysts are looking for 5.46 million in subscriber additions.
Growth is starting to normalize. Netflix notes that its forecast would translate into 54 million paid net additions over the past two years, or 27 million per year. That level of additions is comparable with the company’s growth rate in pre-pandemic conditions.
Additionally, much of Netflix’s new content releases have been pushed into the second half of 2021 due to production delays in 2020 related to the COVID-19 crisis. That means Netflix will incur more content costs while subscriber growth slows.
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