Netflix's second quarter figures beat forecasts, but streaming giant warns of subscriber slowdown

The company added 10.1mln new subscribers during the quarter as consumers searched for content amid pandemic lockdowns across the world

Netflix - Netflix's second quarter figures beat forecasts, but streaming giant warns of subscriber slowdown

Netflix Inc (NASDAQ:NFLX) reported forecast-beating figures for its second quarter, however, the shares turned negative overnight as the streaming giant warned of an impending slowdown in subscriber numbers in the coming months.

The company reported that it had added 10.1mln new subscribers during the quarter as coronavirus lockdowns drove a spike in demand for content streaming services, while revenues in the period jumped to US$6.15bn from US$4.92bn in the same period last year. Net earnings, meanwhile, were at US$720mln, up from net income of US$270.7mln a year ago.

READ: Netflix sees ‘coronavirus boom’ as subscriber numbers soar

However, Netflix warned that its subscriber numbers for the third quarter were likely to come in at 2.5mln, down from 6.77mln in the prior year, as the second quarter ‘boom’ subsided along with the relaxation of lockdown measures.

The flattening out of subscriber growth may also concern investors that the firm’s growth potential is coming under pressure from rival services such as Disney+ and HBO Max.

Netflix’s content schedule could also be about to pump the brakes as the pandemic has forced it to pause production on several projects and push back their release dates.

“While Netflix is still the biggest fish in the tank, if it wants to keep it that way, there is work to be done”, said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, although she said “one of the biggest tools” in the company’s armoury was is local language content in emerging markets.

“These regions have a lot more growth potential than the mature US market. As it stands Netflix offers three times the number of local language productions of rival Amazon, and it would be good to keep that lead. That means spending. Spending is something Netflix does very well, with $14bn splashed on content last year. Lockdowns and the halting of production activity is helping Netflix keep costs down for now, and Netflix’s content cupboard does seem to be reasonably well stocked”, Lund-Yates added.

However, the analyst said the new content will require continuous investment, meaning Netflix’s free cash flow is “set to be bumpy in the medium term”.

“This isn’t the end of the world because the cash gaps get plugged by affordable loans, but that modus operandi could be interrupted if growth were to falter or market share ever ebbs away”, she said.

In a note, analysts at Wedbush retained their ‘underperform’ rating and US$220 price target on Netflix, predicting that “sustained cash burn” should return in 2021 as safe content production became possible again.

However, analysts said subsribers may begin leaving the platform before enough of the new content appears.

“While a high level of consumption is desirable, it drives a need to constantly replenish the content consumed, and Netflix’s extraordinary level of consumption multiplied by its large subscriber base suggests to us that some meaningful percentage of subscribers will “finish” Netflix before a large quantity of new content can be produced. The law of large numbers suggests to us that if the rate of subscriber churn grows by “only” 100 [basis points], Netflix could face a loss of 2mln subscribers per quarter beginning later this year or early next year”, Wedbush said.

The broker added that content migration to competing services and price hikes may also “slow subscriber growth” and consequently cause a negative effect on free cash flow.

Netflix shares were down 7.1% at US$490 in pre-market trading in New York on Friday.

--Adds broker comment and updates share price--

Quick facts: Netflix

Price: 475.74 USD

Market: NASDAQ
Market Cap: $210.18 billion

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