Netflix subscriber slowdown could mark streaming giant’s peak

Missing quarterly target may seem minor but is a concern for firm with a high-growth model

Netflix’s surprise failure to hit its subscriber targets stripped $30bn (£23bn) from its stock market value as investors and analysts expressed fears that the stellar global growth of the streaming service may have peaked.

On Monday night, the company reported it had missed its second quarter subscriber growth numbers in both the US and, most crucially, in the international markets it is now relying on for the vast majority of future growth.

The total shortfall of more than a million may not appear to be a big deal for a streaming service whose subscriber numbers have now past than 130 million globally and whose share price has soared 150% year-on-year to value the business at $172bn.

By comparison, the entertainment group Disney – which spans film, theme parks, broadcasters ESPN and ABC and is spending more than $70bn to try to buy 21st Century Fox to fight the Netflix threat – is valued at $164bn.

Even after four consecutive quarters of subscriber growth that comfortably beat forecasts, a single quarter miss for a company that needs to remain in constant high-growth mode has investors worrying about whether the Netflix peak has arrived.

“This was always going to cause jitters among investors from a company that’s spent so heavily on content in order to boost its subscriber numbers,” said Joshua Owen, a senior trader at Ayondo Markets. “The question for investors is whether this is a blip or something more structural within the video streaming landscape.”

The Netflix juggernaut relies on maintaining rapid global growth to continue paying for the content that is its lifeblood – $8bn on 700 original TV shows and 80 movies this year alone. If the slowdown in subscribers persists, the company’s already pressurised business model could break.

Netflix is on track to make $1bn in profits this year. But the company continues to spend much more than it makes and competition against rivals such as Amazon and Apple is intensifying, forcing budgets ever higher for the best content and talent to win new subscribers.

Netflix expects a negative free cash flow of between $3bn to $4bn this year, meaning the amount its spends on content, marketing and other costs in 2018 will exceed what it earns from subscriber revenue ($16bn) by at least $3bn.

In April, the company issued its fifth bond in three years to help finance its activities, adding $1.9bn in fresh debt.

Its debt mountain has surged from $300m in March 2016 to $6.5bn. And it has committed to spending $17bn to making and licensing TV and film content over the next few years.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

The California-based business that started out as a DVD rental outfit two decades ago has in recent years been viewed as a digital startup, making it hot stock with investors, which has, for the most part, kept it insulated from negative market sentiment and scrutiny.

“The company is still burning cash and piling up debt as it funds the development of its content library and thus customer acquisition,” said Russ Mould, investment director at AJ Bell. “Even some 21 years after its creation, Netflix [still] cannot generate the cash that ultimately pays the bills.

“The question is whether Netflix is generating enough profit and cashflow to support its monster valuation.”

About the Author

Leave a Comment:

All fields with “*” are required

Leave a Comment:

All fields with “*” are required