What’s happening: Shares of Netflix Inc. fell in extended trading on Tuesday despite the streaming service reporting stronger-than-expected revenues for its third quarter.
What happened: Netflix’s stock is among the top gainers this year, with the company benefitting from people remaining at home amid the pandemic.
With stiffening competition in the streaming world and easing covid-19 restrictions, Netflix recorded its slowest quarterly subscriber growth in four years.
How were the results: The No. 1 streaming service reported growth in both sales and profits for the third quarter.
- Revenues grew to $6.44 billion, from $5.25 billion in the same quarter last year, and exceeded the consensus view of $6.39 billion.
- Net earnings stood at $790 million, or $1.74 per share, up from $1.47 per share in the year-ago quarter. The figure fell short, however, of market expectations of $2.13 per share.
Why it matters: As the covid-19 infections began spreading across the world, Netflix added a whopping 15.8 million subscribers from January to March. The company had issued a warning, however, that this phenomenal growth could ease in the second half of the year.
Hoping to add more subscribers, the streaming giant released Enola Holmes, Emily in Paris, and The Devil All the Time in the third quarter. The move did not get the results Netflix was hoping for, as it faced rising competition from Walt Disney and AT&T’s WarnerMedia restructuring its business to put up a tough fight. Meanwhile, the resumption of live sports also affected Netflix’s subscriber growth last quarter.
The company added only 2.2 million paid subscribers globally in the quarter, missing the consensus forecast of 3.4 million and even its own highly conservative projection of 2.5 million.
What helped Netflix’s bottom line the slowdown in production due to the pandemic. Cash flows rose, as the company did not bear any costs making new content while continuing to charge subscription fees. Netflix recorded free cash flows of $1.1 billion, versus a negative figure of $550 million in the year-ago quarter.
For the fourth quarter, management projected 6 million subscriber adds globally. Although this is far better than what was achieved in the third quarter, it came in below the market expectations of 6.51 million.
“The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” Netflix said in a letter to shareholders.
How shares responded: Shares of Netflix plummeted almost 6% to $495.40 in after-hours trading following the release of quarterly results. The stock has added more than 62% since the beginning of the year, with around 5% gains in the past three months.
What to watch: With Europe and some US states reimposing restrictions, investors will keep an eye on an improvement in Netflix’s subscriber adds. Markets will also monitor competition from Apple, Comcast, Amazon, AT&T and others and the impact of this on the popularity of Netflix’s streaming service.