Why did Netflix’s shares plunge?

Q&A: The ‘n’ in ‘Faang’ has not had the best start to the week, but is it just a wobble?

The Netflix empire: Queen Elizabeth (Olivia Colman) takes tea in an image from the third season of royal drama ‘The Crown’, due in 2019.

The Netflix empire: Queen Elizabeth (Olivia Colman) takes tea in an image from the third season of royal drama ‘The Crown’, due in 2019.

 

What’s going on with Netflix?

The streaming giant’s share price opened down more than 13 per cent on Wall Street today after it released a disappointing quarterly update after the close of markets on Monday.

The company gained 5.2 million new subscribers worldwide between April and June, but this missed its own targets by a million. The world’s largest paid online television network also said it expected to add 5 million customers in the current quarter - a slower pace than it achieved a year ago.

It has since clawed back some of the share price losses, as more investors leaned towards the idea that this was a one-off wobble, rather than a sign of tougher times ahead for what has been a rather extraordinary growth story.

Why is Netflix’s share price so closely watched?

Netflix is the “n” in Faang, the elite group of technology stocks (Facebook, Apple, Amazon, Netflix and Google) that outperformed the rest of the market in 2017 and have done so again in 2018 to date.

Netflix shares, which crossed the $400 mark last month, had (as of yesterday) doubled in price this year, and are still trading well up in the year-to-date, despite today’s plunge. Some analysts have questioned whether this growth is sustainable.

What does the company say?

Netflix described the second quarter as “strong but not stellar”. It noted that earnings, margins and revenue were all in-line with its forecasts and “way up” from the previous year: “Internet video is growing globally and we are fortunate to be one of the leaders.”

Oh yes, and it now has a massive 130 million subscribers worldwide.

What do analysts say?

GBH Insights analyst Daniel Ives described the figures as “a near-term gut punch” to Netflix, but added that it was “a speed bump” rather than the start of a longer-term negative trend.

Evercore ISI Research’s Anthony DiClemente said Netflix “may have felt some impact” from the FIFA World Cup in the second quarter and that its ability to deliver a “solid” third-quarter performance will be the key as the debate about the stock’s valuation goes on.

For Deutsche Bank’s Bryan Kraft, it’s the fourth quarter, when Netflix rolls out “a disproportionate amount” of its original content for 2018, that will be the critical one. Netflix will continue to grow, he wrote, but perhaps at a slower pace than previously expected.

Is the competition a problem?

Netflix’s “weak” quarter “isn’t entirely surprising” given Amazon, Hulu, HBO and others are gaining share at its expense, said Paul Verna, principal analyst at research firm eMarketer. New entrants such as Disney and AT&T could also prove themselves as thorns in Netflix’s side, he noted.

Nevertheless, eMarketer expects Netflix will remain “the clear leader” in the US market thanks to its “strong slate of original content” and plans to outspend its rivals: “This is critical in an era when people increasingly choose streaming services on the strength of their content.”

Did Netflix’s new content miss the mark then?

The company typically credits new seasons of its original series with the ability to lure customers, but no show was singled out as a subscriber magnet this time around.

In the quarter, it released a new season of teen drama 13 Reasons Why - which it describes as one of its biggest originals - as well as more episodes of Marvel’s Jessica Jones and Marvel’s Luke Cage, while Hannah Gadsby’s comedy special Nanette won critical acclaim.

But we have no way of knowing for sure what Netflix’s viewing figures were like in the second quarter because it doesn’t release them. As the service does not carry advertising, it has no requirement to release audience numbers for individual shows and it has never done so.

How much is Netflix spending on content?

Record sums. Netflix chief executive Reed Hastings announced last October that the company would spend a whopping $8 billion (€6.8 billion) on content this year, with about 85 per cent of this going on original television series and films. This makes it the biggest spender in town.

The rationale is simple: Netflix doesn’t want its catalogue to rely on costly licensing deals with rivals. But in order to pull off this attention land grab, Netflix has borrowed heavily and it needs to carry on adding subscribers - and/or put up its prices - to keep the show on the road.

In 2018, it is expected to spend $2 billion (€1.7 billion) on marketing alone. This doesn’t make the company immune to the conundrum facing all media companies: its audience has a finite number of viewing hours available. Netflix’s biggest competitor? According to Hastings, it’s “sleep”.

Are its shows any good?

The judges of the US Emmy awards think so. Netflix’s letter to shareholders made sure to mention that it was “starting to lead artistically in some categories”. Its shows earned more Emmy nominations this year than any other company, breaking a 17-year run held held by Time Warner company HBO (which spends about a third of what Netflix does on original content).

Awards matter to Netflix because they provide critical marketing for the service. It won’t have gone unnoticed that it was rival Hulu that became the first online television company to win the coveted Emmy for best drama, which it did last year for The Handmaid’s Tale.

But with such a glut of content on Netflix, there are inevitably some duds amid the classics. Expensive productions such as Baz Luhrmann’s The Get Down and star vehicles such as the Naomi Watts therapy drama Gypsy are among the original productions to have been hit with the Netflix axe.

What kind of impact is Netflix having on broadcasters?

A big one. The BBC’s last annual report said its own research showed young people ( aged 16-24) in the UK were now spending more time watching Netflix than all BBC television, including the iPlayer.

In a “if you can’t beat them, join them” approach, broadcasters are now trying to make use of Netflix’s deep pockets. The BBC and Canada’s CBC have partnered with the company on drama production, while RTÉ director-general Dee Forbes has said she would be “very happy to talk to them” about co-productions.

“When it comes to the right story and the right content, why not?”

How many Irish subscribers does Netflix have?

There are no official figures. However, some 42 per cent of households questioned for Comreg’s Ireland Communications Survey 2017 said they accessed the television streaming platform. If this percentage is applied to the number of fixed residential broadband subscriptions in the State, it suggests that at least 500,000 Irish households use Netflix.

That’s quite some number considering the service only launched here in 2012.