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 Netflix shares fell about 11% on worries about its earnings
report on Wednesday that showed lower-than-expected global
growth and signs of trouble in its U.S. base ahead of Walt
Disney Co's <DIS.N> much-awaited launch of a rival service later
this year.
Netflix, whose price-to-earnings ratio is by far the largest of
the five big U.S. tech companies making up the so-called FAANG
group, has quadrupled in value since 2015 but at $321 per share
is down $100 from 2018 peaks. The other FAANG companies are
Facebook Inc <FB.O>, Amazon.com Inc <AMZN.O>, Apple Inc <AAPL.O>
and Alphabet Inc <GOOGL.O>.
The April-to-June period tends to be seasonally weak for Netflix
in the United States, where warmer weather and longer days keep
viewers outdoors.
Brokers Cowen & Co said Netflix had missed expectations for
second-quarter subscriber numbers three times in the last four
years. This year, however, the Los Gatos, California-based
company set a series of aggressive price hikes, and lost U.S.
subscribers for the first time in eight years.
"They raised prices in the U.S. by an average of $2 per month,
and most subscribers learned about their increase during Q2,"
said Wedbush Securities analyst Michael Pachter.
"I think that was a much bigger driver of churn than a dearth of
content."
STILL A BUY
Ten Wall Street brokerages cut their share price targets to
reflect Thursday's fall, but did not downgrade the stock, still
seen by a majority of Wall Street firms as a high-potential
growth business and a clear "buy".
The relatively small price drop in the company's $12.6 billion
of junk bonds affirmed the view that the second-quarter results
are a blip. While all Netflix debt weakened on Thursday, the
biggest price moves were just 2.5%, like on the 6.375% bond
coming due in May 2029 worth $800 million, according to
Refinitiv data.
"We're not concerned. We're still keeping to our forecast," said
Neil Begley, senior vice president at Moody's Investors Service.
The credit market's faith in Netflix has allowed it to borrow at
very cheap rates to fund content creation and acquisition. That
is unlikely to change based on the disappointing second-quarter
results, said Begley.
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Netflix bond prices did not fall enough to attract bargain hunters.
"I'd be looking for a 300 basis point spread or so in a new 10-year
deal as fair value," said John McClain, portfolio manager at Diamond
Hill Capital Management. The spread on the 6.375% bond due in 2029
is around 275, he noted, "so I'd want a 325 basis point spread to
get interested."
While competition is set to heat up with the upcoming launches of
Apple TV and Disney+, several analysts said Netflix's global reach
is likely to give it an edge.
Netflix added just 2.83 million international paid streaming
subscribers, compared with Street expectations of 4.8 million, but
it now has 151.6 million worldwide, dwarfing its nearest rivals
Amazon Prime and HBO.
"By 2025, based on Disney projections, it looks like Netflix will be
spending at least five times as much on content as Disney+," said
Pivotal Research Group analyst Jeff Wlodarczak.
"I also think Disney+ is likely to help accelerate consumers away
from traditional Pay TV toward OTT (content over an internet
connection) which should benefit Netflix."
The company raised prices in Britain, Switzerland, Greece and
Western Europe in the quarter, testing the waters in some of its
wealthiest markets at a time when it is still spending massively
more than it earns to win the content battle.
Netflix began the third quarter with the release of its 1980s-set
smash-hit "Stranger Things" and will follow with new seasons of
"Orange is the New Black" and "The Crown," as well as the eagerly
awaited Martin Scorsese movie "The Irishman."
"We would note Netflix misses have been followed by strong quarters,
and, along those lines, we expect Netflix's very strong 2H slate
will lead to a rebound in sub growth," Credit Suisse analysts wrote
in a client note.
(Reporting by Supantha Mukherjee and Akanksha Rana in Bengaluru, and
Kate Duguid in New York; editing by Patrick Graham and Richard
Chang)
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