After the close of trading today, July 18, Netflix (NFLX) reported second quarter revenue and subscriber growth below Wall Street projections. In after hours trading Netflix shares fell 16.81%. Tomorrow’s season will show whether the results at Netflix affect expectations across the technology and Internet sectors as we move into the heart of earnings season for those sectors.
The dimensions of any effect beyond Netflix will also depend on whether traders and investors believe that the company’s disappointing guidance for the third quarter is a harbinger of things to come across these sectors. Netflix forecast slower than elected subscriber growth for the third quarter of 300,000 subscribers in the United States and 2 million subscribers in overseas markets. Wall Street had been expecting 774,000 new subscribers in the United States and 2.85 million in overseas markets.
In the second quarter Netflix added a net 1.68 million subscribers, well below the company’s own forecast in April of 2 million new subscribers overseas and 500,000 in the United States. Overseas the company added 1.52 million new subscribers; in the United States Netflix added 160,000 new subscribers.
Two disconcerting facets in the miss and the disappointment.
First, higher prices increased the churn among Netflix subscribers with more current subscribers canceling their service. This trend seemed especially powerful among older subscribers.
Second, Netflix seems in danger of falling in the “it’s always something” school for explaining disappointing growth. Last quarter, according to the company, it was due to problems with new chip-enabled credit cards. Next quarter, the company said today, Netflix will face competition from the Summer Olympics.
That’s not exactly what an investor wants to hear from a company with shares trading at 343 times trailing 12-month earnings. (Not that anyone cares about Netflix’s current earnings per share but they did increase to 9 cents a share in the second quarter, up from 6 cents a share in the second quarter of 2015.)
