Netflix’s stock was down over 14% in after-hours trading yesterday after the company reported that it missed expectations on revenue and subscriber growth.
- Stocks for almost every other tech company in the streaming business were also down after the news broke.
Why it matters: Netflix’s miss reignites debate around whether the new tech economy, where companies are highly-valued despite being barely or far from profitable, is sustainable long-term.
Between the lines: Netflix missed its own subscriber growth expectations by a million users and admitted its fastest growing expense is marketing.
- What troubles investors: If Netflix is approaching domestic market saturation from a subscriber perspective, and it’s heavy marketing spend isn’t showing return, the potential to turn cash flow positive could be lower.
- “The bulls expected continuing upside to their subscriber guidance … and when those expectations were cracked, the stock cracked,” said Michael Pachter, managing director of Equity Research at Wedbush Securities.
Be smart: Most analysts agree that Netflix’s momentum wasn’t sustainable, especially in the U.S., where analysts say the tech giant was beginning to reach a point of saturation.
- Jill Rosengard Hill, EVP at broadcast research firm Magid, tells Axios
Magid research predicted a 2% net decrease in subscribers for Netflix in the U.S. six months ago.
- The streamer is also facing increasing competition from other subscription video on-demand companies gaining market share, like Amazon, HBO and Hulu, as well as legacy media companies looking to break into the on-demand economy, like Disney and AT&T, says eMarketer principal analyst Paul Verna.
Bullish investors argue thatthe company will bounce back, and that Netflix is still an attractive investment for the foreseeable future.
The bottom line:The corporate structure of newer tech companies, as well as the pace of tech innovation, has caused investors to reward companies that can scale and adapt to consumer trends quickly, as opposed to companies that focus on consistently delivering profit, like legacy media networks.
- Because of this, streaming companies are able to invest billions of dollars in creating and buying content to lure viewers from traditional networks, creating a virtuous cycle of dominance.
- Case in point: Netflix topped HBO for the first time in 17 years with the most Emmy nominations for a network this year.
What’s next: None of Netflix’s competitors consistently disclose subscriber numbers, but earnings over the next few weeks for AT&T (HBO’s new owner), Amazon, and Hulu’s owners (Disney, Comcast, Fox and Turner, now owned by AT&T) could shed light on their content strategies.