Investors slam Netflix due to slowing subscriber growth
Updated 5:05 pm, Wednesday, October 15, 2014
Wall Street investors hammered Netflix stock after the market closed Wednesday when the Los Gatos company revealed that a price hike this year may have slowed subscriber growth.
Netflix shares plummeted by more than 25 percent in after-hours trading after the online streaming company said it 'over-forecasted membership growth,' primarily because of a $1-per-month fee increase for new subscribers instituted in May.
The company previously estimated it would add 3.69 million subscribers, but instead grew by 3.02 million.
'As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago,' Netflix said in a letter to investors.
But the company isn't going to roll back those new fees.
'We remain happy with the price changes and growth in revenue and will continue to improve our service,' the letter said. 'The effect of slightly higher prices is factored into our Q4 forecast.'
Analyst Paul Verna of Internet research firm eMarketer called the investor sell-off a typical Wall Street 'tempest in a teapot.'
'Netflix's precipitous post-market stock drop is an overreaction that reflects Wall Street's habit of excessively punishing companies' that miss forecasts, he said. 'It didn't help that this happened on a day when the Dow lost 1 percent of its value, not to mention the gains it made in 2014.'
Netflix stock mostly survived the down stock market, closing at $448.59 per share, down only 53 cents. That was even after premium pay-TV network HBO announced it is planning to stream its own content next year.
Yet despite an otherwise positive third-quarter earnings report, released after the close of trading on the Nasdaq market, Netflix stock fell by more than $115 per share after hours.
Netflix now has a record 53.06 million subscribers to its online streaming video service. The company says it expects to add another 4 million by the end of the year.
Net income was $59 million on revenue of $1.22 billion, up from $32 million on $962 million in revenue in the third quarter of 2013.
Netflix projected that its revenue would rise to $1.3 billion in the fourth quarter, although it said net income would be about $27 million. The company continued to plow profit back into expanding its international markets, where it now has about 2 million subscribers.
Investors, however, might have already been jittery about HBO announcing it would start a stand-alone video streaming service with no pay TV subscription required. The premium network wants to go after the same customers that are fueling Netflix's growth.
But Verna said investors overreacted.
'The fundamentals of Netflix's business haven't changed, and the shot across the bow from (HBO) shouldn't have caused a panic on this scale,' he said.
Still, HBO will increase competition for Netflix, said Parks Associates analyst Glenn Hower.
'If HBO can supply a large and diverse library, including their original content, for a price comparable to Netflix, Netflix is going to have a much more difficult time attracting and retaining customers,' Hower said. 'Lack of HBO original content has been a criticism of Netflix, and if consumers can get it through an HBO streaming service without a TV subscription, that is where they are going to go.'
But he said Netflix has shows, including original programming like 'Orange is the New Black,' that HBO doesn't offer, 'so there is definitely room for both services to coexist.'
In a Google Hangouts video conference for analysts, Netflix CEO Reed Hastings said he also believes the market is big enough for everyone.
'All the big networks are moving to Internet video,' he said. 'It's just becoming a very large opportunity.'
Benny Evangelista is a San Francisco Chronicle staff writer. E-mail: bevangelista@sfchronicle.com. Twitter: @ChronicleBenny
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