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Netflix Whiffs on Member Growth

By Daniel Sparks - Jul 17, 2019 at 5:47PM

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Should investors be worried?

Shares of Netflix ( NFLX 0.69% ) are sinking in after-hours trading on Wednesday, following the company's second-quarter earnings release. As of 5:12 p.m. EDT, shares were down 12.4%. The pullback in the company's stock price comes as the company reported worse-than-expected net paid member additions.

Here's a look at the streaming TV company's member growth during its second quarter -- and how it missed the mark.

A group of young people watching TV together

Image source: Getty Images.

2.7 million members weren't enough

Netflix added 2.7 million new members in its second quarter.

It's not surprising the figure disappointed. Going into the period, management forecast five million paid member additions -- slightly below the 5.45 million paid members it added in the second quarter of 2018.

In addition, weakness in the U.S. may have spooked some investors. The company's paid memberships fell sequentially in the domestic market, declining from 60.2 million Q1 to 60.1 million. Fortunately, strong growth internationally helped pick up some of this slack. Paid international member additions came in at 2.8 million. But management did say that its paid member additions were lower than expected across all of its regions.

The company had several excuses for its worse-than-expected member growth, citing a slight impact from some of the price increases rolled out during the quarter, a larger-than-expected pull-forward effect in Q1 (member growth easily beat expectations in Q1), and weaker-than-expected member growth from content that made its debut during Q2.

Misses are inevitable

The stock's decline is reminiscent of Netflix's second quarter last year -- another period in which the streaming-TV giant missed its own forecast for member additions. Just like this year's second quarter, the stock fell after last year's whiff on member growth as well.

Notably, this year's miss on member growth is even worse than last year's. Paid members in Q2 2019 were 2.3 million members short of management's forecast. That compares to coming 650,000 paid members short of management's forecast last year. 

Despite Netflix's significant miss when it comes to member growth, investors shouldn't worry about slowing member growth yet. Just as was the case when Netflix missed expectations in the year-ago period, management reminded investors in its second-quarter update on Wednesday that its forecasts aim for accuracy (not conservativism). That means that "in some quarters we will be high and other quarters low relative to our guidance," management explained in its second-quarter shareholder letter.

Of course, if a meaningful deceleration in member growth turns into a pattern in the coming quarters, then investors may need to reassess their expectations for the company. In the meantime, however, there's no reason to overthink this underwhelming performance from the key metric.

For what it's worth, Netflix provided robust guidance for its Stranger Things-driven third quarter. Management forecast 7 million paid member additions during the period, up from 6.07 million additions in the third quarter of 2018.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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