Netflix shares slip further amid growth concerns

Netflix’s stock price continued to slide, a sign investors are worried the video-streaming service’s faltering subscriber growth could augur a broader slowdown.

The company’s shares fell more than 13 percent shortly after the start of trading on Tuesday before rebounding, with the stock trading down nearly 6 percent as of 2:40 p.m. Eastern time.

Netflix added  5.1 million streaming users in the latest quarter, below the 6.2 million forecast the company gave in April. The company also missed its targets for international growth, while financial guidance for the second quarter fell short of analyst expectations.

On Wall Street, the slowdown is raising questions about whether Netflix can sustain the rapid-fire growth that has made it one of the hottest companies in tech, especially as bigger players crowd its turf. Faced with growing competition from Amazon, Hulu, Sling TV and other streaming services, Netflix is also having to pump more money into programming. The company plans to spend as much as $13 billion on original content this year, far more than many of its rivals.  

“Netflix’s business model does not appear as deep as these other models (Amazon = Online Shopping, Google = Search, Facebook = Social), and we doubt that they can create and enjoy monopoly economics in content creation and internet distribution,” Michael Nathanson, a senior research analyst at MoffettNathanson, wrote in a note to clients. “The barrier to entry here, in part, is sourced by spending more money faster than others can. There is little sign that rivals are falling away.”

Indeed, bigger rivals are on the march. Walt Disney plans to launch a rival streaming service in 2019. Hulu also could emerge as a more formidable competitor, as Disney and Comcast battle for the entertainment assets of  21st Century Fox, including its 30 percent stake in Hulu. AT&T is planning to hike spending on HBO to make it more competitive with Netflix, and Apple and Facebook are also raising their investments in content.

According to Wedbush Securities Analyst Michael Pachter, Netflix’s content and marketing costs, along with its technology spending, are growing at about the same rate as the company’s revenue.

“Simply stated, we don’t see any potential for Netflix to deliver operating leverage on its content investment until the company is able to create a sufficient quantity of high-quality owned original programming to allow it to grow its content spending more slowly,”  Pachter said in a report. “Should Hulu begin to compete effectively for Warner, Fox, Universal, and Disney content, we expect exclusive deals to sharply reduce the amount of content purchased by Netflix, limiting Netflix’s ability to raise price[s].”

Despite the subscriber miss, Netflix CEO Reed Hastings said the company’s fundamentals have never been stronger. 

“Our viewing is setting year-over-year records, the shows that we have coming,” he said in a conference call on Monday. “So we’re feeling very strong about the business.”

During the latest quarter, Netflix earned a profit of $384 million, or 85 cents a share, a gain of more than 481 percent from the $66 million, or 15 cents, it earned in the year-ago period. Yet while revenue rose more than 40 percent, it lagged the $3.94 billion analysts’ had expected.  

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