Image source: Netflix.
What: Shares of video-streaming company Netflix (NFLX +1.13%) have dropped 25% so far this year as of the market close on June 27, according to data provided by S&P Global Market Intelligence. Much of this decline can be attributed to the company's first-quarter report in April, which featured mixed results and guidance for subscriber adds that was well below analyst expectations.
So what: Netflix beat analyst estimates for earnings but missed on revenue when it reported its first-quarter results, but the bigger news was the company's guidance. Netflix expects to add just 0.5 million U.S. streaming subscribers during the second quarter, down from 0.9 million during the same period last year. In international markets, the company expects to add just 2 million subscribers, less than the 2.37 million it added during the second quarter of 2015.
Netflix has been investing heavily in its international business, sacrificing profitability to drive growth. The company completed its aggressive international roll-out in January, bringing its service to nearly every major country except China. This expansion has been expensive, driving down Netflix's profits, but the company now has over 36 million subscribers outside the United States.
According to Bloomberg, analysts expected Netflix to guide for 3.45 million subscriber adds in the second quarter, nearly 1 million higher than the company's actually outlook. Investors have accepted Netflix's disappearing profits in recent years because of the company's international growth potential, so a slowdown in subscriber adds understandably caused concern.
Now what: Netflix still has plenty of growth potential, especially considering it's been operating in many countries for less than a year. Even after the decline so far this year, Netflix stock is up more than 700% since the start of 2012, driven by impressive growth and optimistic assumptions about the future of the company. The stock is expensive, trading at about 5.4 times sales, and this high price may be part of the reason the stock has been hit so hard in 2016. If Netflix's growth story fails to live up to investors' expectations going forward, the stock could continue languish.
