Netflix Isn’t Being Honest About Why Growth Is Slowing, Some Analysts Say

Netflix stock fell on Wednesday as Wall Street reacted to the streaming video leader’s lackluster subscriber growth forecast.




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Los Gatos, Calif.-based Netflix (NFLX) blamed the reopening of the economy as the Covid-19 pandemic subsides for its weak subscriber gains. But some Wall Street analysts say Netflix is downplaying the heightened competitive environment, which likely has crimped its growth.

Late Tuesday, Netflix reported adding 1.54 million new subscribers in the June quarter, compared with 10.09 million in the year-earlier period. Wall Street had predicted 1.15 million new subscribers in the period.

In the U.S. and Canada, Netflix lost 430,000 subscribers in the second quarter. The internet television network made most of its subscriber gains last quarter in the Asia Pacific region.

Netflix Stock Falls On Slowing Growth Prospects

On a conference call, Chief Financial Officer Spencer Neumann said market reopenings post-Covid in Europe and North America provided a “headwind” to subscriber acquisition in the second quarter.

Netflix has posted four straight quarters of decelerating subscriber growth. Its total subscribers rose 8.4% year over year in the second quarter.

For the current quarter, Netflix expects to add 3.5 million new streaming subscribers. However, Wall Street was looking for Netflix to add 5.63 million new subscribers in the September quarter. In the same period last year, Netflix added 2.2 million new subscribers.

On the stock market today, Netflix stock sank 3.3% to 513.63.

Meaningful Competition Has Arrived

With 209.18 million total subscribers worldwide, Netflix is hitting the law of large numbers, where growth becomes harder to obtain.

“It is clear that Netflix has reached a scale at which incremental subscriber growth will be increasingly difficult not just in the U.S. but internationally,” Third Bridge senior analyst Joe McCormack said in a note to clients.

At the same time, competition, especially in the U.S., has finally arrived in a “meaningful” way, McCormack said. Top Netflix rivals include Walt Disney‘s (DIS) Disney , AT&T‘s (T) HBO Max, Comcast‘s (CMCSA) Peacock and Amazon (AMZN) Prime Video.

Co-Chief Executive Reed Hastings contends that Netflix hasn’t seen a negative impact from Disney, HBO and other streaming services yet. But Needham analyst Laura Martin challenged that statement.

“Netflix reiterated that it is seeing no impact from competition, but capitalist theory says that’s impossible,” she said in her note to clients.

Netflix Ramps Up Low-Cost, Mobile-Only Plans

Analysts at MoffettNathanson, Rosenblatt Securities and Wedbush Securities also said competition is weighing on Netflix’s subscriber growth.

“It should be clear by now that the U.S. streaming market has become much more competitive over the past few years as new entrants and established players have prioritized streaming content while cutting subscription prices to attract new users,” MoffettNathanson analyst Michael Nathanson said in a note. “As such, while streaming as an industry is in structural growth mode, Netflix’s position as a first mover is clearly being challenged.”

Nathanson rates Netflix stock as neutral.

In early July, Netflix expanded its low-cost, mobile-only subscription plan to 78 additional countries in Southeast Asia and sub-Saharan Africa. It previously offered the $3-a-month service in five markets: India, Indonesia, Malaysia, Thailand and the Philippines.

The expansion of Netflix’s “supercheap” mobile-only plans “suggests slowing sub adds for Netflix’s higher-priced core service,” Needham’s Martin said.

Netflix is facing especially tough competition in India from Amazon Prime Video, Martin said. She rates Netflix stock as underperform.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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