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Is Good Time Finally Coming to the Carriers???Barron’s : Here’s Why Netflix’s Problems Have Only Just Begun By Tae Kim, July 19, 2019 8:36 pm ET Netflix has a problem. The company’s strengths—including scale, value, and a vast library—may not be enough to make up for shortfalls in show quality. And no one, not even Netflix, can make a hit every time. Before Netflix’s earnings report this past Wednesday, the bull case for the stock was that the streaming giant’s world-wide subscriber base of 150 million was still a starting point. Plus, there were millions of existing subscribers who wouldn’t balk at higher prices. But Netflix’s aura of invincibility is under question after the company stunned Wall Street with subscriber growth that came in nearly 45% lower than Netflix’s own projections. For its second quarter, Netflix added 2.8 million net new international subscribers and lost 126,000 U.S. users, versus Wall Street expectations for 352,000 domestic additions and 4.8 million international adds. Netflix had forecast a total of five million new subscribers. The company’s shares fell 10% on Thursday, a day after the results. They fell another 3% on Friday. ...... “The drop in U.S. subscribers suggests that viewers on lower pricing tiers dropped Netflix as a result of the price increase,” eMarketer analyst Eric Haggstrom wrote in an emailed statement. The more worrisome issue may be content. Netflix admitted the weakness of its second-quarter releases were also a factor in its subscriber miss. “We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape,” the company said in its letter. “Rather, we think Q2 content slate drove less growth in paid net adds than we anticipated.” Netflix said its current quarter has started off strong thanks to the third season of Stranger Things, which was released earlier this month. That’s good news now, but it just confirms subscribers’ insatiable desire for engaging new content. Netflix is on the hook for a Stranger Things-like hit every quarter if it wants to hit its growth target. Rival content makers are no longer helping. In its latest investor letter, Netflix reminded shareholders that most of its Disney content, along with Friends and The Office, will leave the service in the coming years. According to third-party measurement services, Friends and The Office are two of the most-watched shows on Netflix. In June, NBCUniversal announced its new streaming service would have exclusive domestic streaming rights for The Office starting in 2021. Earlier this month, WarnerMedia said Friends would be exclusive its HBO Max service when it launches next spring. The company tried to minimize the departures by saying its most popular current titles are only a “low single digit percentage” of the streaming hours viewed and any content lost will free up money for other offerings. It will have to find those offerings in an increasingly competitive environment. Disney is set to launch its new Disney+ streaming service on Nov. 12 at a price of $7 a month, about 45% lower than Netflix’s standard plan. In its first year, Disney plans to have a library of 7,500 TV episodes and 500 movies—including the company’s Pixar, Star Wars, and Marvel films. Even Netflix bulls admit that investors will be hyper-focused on further subscriber growth hiccups in the coming quarters. “If Netflix misses subs in the quarters after Disney+ launches, the market will make the correlation anyway, and we expect the downside effect on Netflix stock will be several times more than usual,” Bernstein analyst Todd Juenger, who has an Outperform rating on Netflix shares, wrote last week. So what is the setup for Netflix stock here? Last month, Barron’s said Netflix was priced for perfection and facing risk from increasing streaming competition. To be sure, we’ve been wrong on Netflix stock in the past, including in an August 2017 cover story. But the bearish argument may finally be playing out. Rising government scrutiny over the power of big technology companies also makes it unlikely there will be any near-term acquisition bid for Netflix, a longtime source of support for the stock. Even with the shares down 13% since early June, Netflix stock trades at 65 times earnings estimates for the next 12 months. The elevated multiple doesn’t seem to factor in the current risks. Netflix ended its earnings call for investors this past week by congratulating competitor HBO for its record-breaking 137 Emmy nominations this year. “They continue to be the gold standard that we chase, and we’re really thrilled for them,” Netflix chief content officer Ted Sarandos said. That was a gracious gesture, but it’s also one more important reminder: Content always wins. Write to Tae Kim at tae.kim@barrons.com http://www.barrons.com/articles/netflix-stock-has-new-worries-including-disney-and-the-loss-of-friends-51563582983?mod=hp_DAY_4 |
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