All eyes were on subscriber growth when Netflix (NASDAQ:NFLX) reported its fourth-quarter results earlier this week, and while the company delivered 1.3 million more subscribers than expected, the stock price still slumped nearly 4% on the results.
The culprit? Netflix U.S. subscriber totals came in lighter than forecast. The company added about 420,000 domestic subs, missing the 600,000 it was hoping for. When Netflix provided its guidance last quarter, management said it expected "modest headwinds to our near-term growth, which we have tried to factor into our guidance." The uncertainty was caused by the debut of new streaming services from Disney and Apple. The lower subscriber numbers seemed to confirm investors' worst fears.
Netflix stock soared more than 7% on Thursday, gaining back all it lost and more, on a positive analyst note and news that the cable industry is hemorrhaging subscribers faster than expected. Let's take a closer look at why these two announcements are great news for Netflix.
Cord-cutting takes center stage in Comcast's earnings
Before the market opened on Thursday, Comcast (NASDAQ:CMCSA) reported the results of its fiscal fourth quarter. The cable giant, which also sells broadband and is the parent of NBCUniversal, reported generally positive results.
Comcast revenue grew to $28.4 billion, up 2% year over year, coming in slightly ahead of analysts' consensus estimates of $28.2 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $8.4 billion, up 3% compared to the prior-year quarter. Comcast added 442,000 high-speed internet customers during the quarter, up 26% year over year, and well over the 378,000 expected by Wall Street.
With those results as a backdrop, investors still bid down Comcast shares by 4%. Why were they unhappy? Because Comcast al reported a net loss of 149,000 cable TV customers, illustrating that cord-cutting is gaining steam. While the number was on par with what was anticipated by analysts, it was a significant acceleration from the 29,000 cable customers the company lost in the year-ago quarter. To make things worse, Comcast CFO Michael Cavanagh said the company expects greater losses of cable TV customers in 2020.
Analyst: Comcast's pain is Netflix's gain
Stifel analyst Scott Devitt said the results from Comcast were good news for Netflix, even in the face of new streaming competitors. "Comparing Netflix to [new competitors'] introductory pricing and/or inferior over-the-top products as a justification for worrying about the competitive climate is missing the fact that the cable, telecom, and satellite video industry (where all the money is) is shrinking with no end in sight," Devitt wrote in a note to clients. The thinly veiled shots about pricing were clearly aimed at Disney+ and Apple TV+, which offered steep discounts and promotional giveaways to bolster early demand for their streaming services.
The analyst was already bullish on Netflix, arguing late last year that even as competing streaming services were set to launch, Netflix was a "global growth story" that was still on track. "While the highly visible launches of the competing services could create some near term noise, in our view, management has adequately set expectations given some level of uncertainty. It will require monitoring, but we believe there is upside potential when the company next reports in January," he said.
This echoed sentiments expressed by Netflix in its quarterly shareholder letter, which argued that the new streaming competitors were "reinforcing the major trend of the transition from linear [traditional broadcast and cable TV] to streaming entertainment. This is happening all over the world and is still in its early stages, leaving ample room for many services to grow as linear TV wanes."
Thinking long-term rather than reacting to news
The combination of accelerating cord-cutting and some positive confirmation bias provided by Devitt gave Netflix shareholders a confidence boost, driving the stock higher in the process. It's important to note that Netflix's fortunes didn't change over the past couple of days. It was fear followed by enthusiasm that sent the tech giant's stock on a two-day roller-coaster ride.
The news that consumers are abandoning cable isn't anything new, it's just a matter of how many and how fast. Overall, however, it is good news for Netflix. As the industry leader in streaming video, the company has the most to gain.