Netflix's Stock Price Tumbles as Higher Prices Lead to Churn
July 2019 was an opportune month to buy Netflix stock, shortly after the company announced its Q2 results. Overall revenue was up, year over year, by 26% to $4.92 billion, meaning that earnings per share (EPS) beat analysts’ estimates by an impressive 8.16%. The company’s cash on hand was up to $5 billion, an increase of 28.11% compared to a year prior, meaning it added around $1.6 billion to its war chest.
By all measures, beating EPS estimates is a formula for a stock to rise. But as we’ve seen with Apple’s stock price, sometimes rational discussions give way to disproportionate expectations. And in Netflix’s case, because the company only beat EPS expectations by single digits—rather than the 30% average of the prior three quarters—the stock took a beating.
The argument for the subsequent sell-off of Netflix—the stock dropped off precipitously, losing 10% over the course of 2 days—was a decrease in subscriber growth in the U.S. market. Netflix lost 126,000 paid subscribers in the U.S., even though its overall gain in subscribers was more than 2.7 million for the quarter.
Perhaps due to the expectation that Netflix constantly beats EPS estimates, analysts had expected 5 million subscribers to be added during the quarter. The fact that only half that number were added, as well as the fact that subscribers in Netflix’s home market declined, led to the stock being hammered. From July 10, when Netflix closed at $381, to July 17, when it was trading at $362.44 just before the earnings announcement, the stock had traded within about a 5% range. After the earnings and subscriber shortfall announcement, the stock lost 16% of its value and closed at $307.30. It has fallen even further as of this writing, closing at $299.11 on Aug. 14. In other words, in roughly a month, the stock went from $381 to $299.11, a drop of about 21% overall.
What’s interesting, at a cursory glance, is just why a Q2 2019 drop of 126,000 subscribers—less than two-tenths of 1 percent in the U.S. market, where Netflix had 60.2 million subscribers in Q1 2019—caused such an uproar.
It turns out—and this is the warning for OTT-based services—that the subscriber drops were in parts of the U.S. market where Netflix had chosen to raise prices.
What’s also interesting is that this coincides with a recent finding that customers in the U.S.—the most mature market for Netflix subscriptions—are not going to tolerate price increases beyond a certain point, with $21 per month being the rate consumers are most comfortable with. That means that as Netflix increased monthly subscription prices, something had to give. And what consumers gave up was the Netflix subscription. (It brings up an interesting question: What term do we use for this? Do we call this churn or cordless cutting?)
So why do I say that July was a good month to buy Netflix stock? Two reasons.
First, the earnings report didn’t cover Stranger Things season 3, which launched the week after Q2 ended. Netflix is expecting 7 million subscribers to be added in Q3, including a bump in U.S.-based subscribers, thanks in no small part to Stranger Things.
Second, the company’s international growth is solid. Back when Netflix had limited uptake in foreign markets, analysts complained that it wasn’t diversified enough across the globe. So it goes almost without saying that the brouhaha around a microscopic drop in subscribers in the company’s most maturing market is a tempest in a teapot.
If the industry is listening, there’s a very solid lesson for Amazon, Disney, Hulu, Sling TV, and a host of other OTT players: The market has price elasticity, but it’s not nearly as elastic as it was a few years ago.
[This article appears in the September 2019 issue of Streaming Media Magazine as "How Much Is Too Much?"]
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