By Jon Swartz
Netflix Inc. investors can breathe easier — for at least three months or so.
The streaming leader announced the net addition of 6.77 million paying subscribers in its third-quarter financial results Wednesday afternoon, an about-face from the previous quarter, when it came up frighteningly short. Netflix /zigman2/quotes/202353025/composite NFLX +1.02% had projected 7 million net subscription additions worldwide, a healthy jump from 6.1 million in the year-ago quarter, and analysts on average projected 6.7 million, according to FactSet.
The fourth quarter is a different story, however. Netflix projected 7.6 million additions in the fourth quarter, far shy of the 9.6 million Wall Street analysts were expecting, and less than the 8.8 million that Netflix reported in the fourth quarter of 2018. The company also said that it no longer expects subscriber growth to increase for the full year from the 2018 total, in part due to increased competition.
“ While we had previously expected 2019 paid net adds to be up year-over-year, our current forecast reflects several factors including less precision in our ability to forecast the impact of our Q4 content slate, which consists of several new big IP launches (as opposed to returning seasons), the minor elevated churn in response to some price changes, and new forthcoming competition,” Netflix executives said in a letter to investors .
In a video earnings call late Wednesday, Netflix Chief Executive Reed Hastings expressed confidence Netflix can compete effectively against less-expensive services coming from Apple Inc. /zigman2/quotes/202934861/composite AAPL -0.29% and Walt Disney Co. /zigman2/quotes/203410047/composite DIS -1.49% , though he acknowledged the considerable content catalog of Disney.
The subscription growth, coupled with strong revenue and earnings, sent shares of Netflix up more than 10% in after-hours trading. The Los Gatos, Calif.-based company reported revenue of $5.25 billion, up 31% from a year ago, in line with FactSet estimates. Earnings per share of $1.47 blew past estimates of $1.03 a share, according to FactSet. It did, however, offer Q4 revenue guidance ($5.44 billion) that fell short of FactSet estimates ($5.51 billion).
The company’s recent story arc has been fraught with fear and uncertainty: A well-documented dip in net subscription additions in the second quarter; the pending loss of seminal content such as “Friends” and “The Office” to competing streaming services; emerging threats from Apple, Disney, AT&T Inc. /zigman2/quotes/203165245/composite T -0.34% , Comcast Corp.’s /zigman2/quotes/209472081/composite CMCSA -2.32% NBCUniversal and even AMC Theatres. It all added up to a 26% decline in Netflix shares since July 3.
“The launch of these new services will be noisy,” Netflix executives admitted in their letter. “There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance.”
Wedbush Securities analyst Daniel Ives warned in a research note Tuesday that Apple in particular has the chance to reduce viewership hours of Netflix. Less expensive subscription services from Apple ($4.99 a month) and Disney ($6.99), their ability to provide potent content through original programming and acquisitions, and massive installed bases “could enable Apple and Disney to disrupt roughly 15% of Netflix’s target customer base within the next 12 to 18 months and create a much more competitive pricing environment.”
Ives added that Apple has committed $6 billion annually to original shows — significantly more than the $1 billion originally reported — to “keep pace in the content arms race.”
While Netflix acknowledged in its letter to investors that its rivals have “some great titles (especially catalog titles), none have the variety, diversity and quality of new original programming that we are producing around the world.” Hastings pointed to a “way better” original movie slate that includes “The Irishman” and “Dolemite” during the video call.
The company said that beginning next quarter it plans to disclose revenue and membership by regions: Asia Pacific (APAC), Europe, Middle East & Africa (EMEA), Latin America (LATAM), and the U.S. and Canada (UCAN). The change in reporting reflects healthy subscription growth overseas and a saturated U.S. market.
More than the company’s bottom line, subscriptions have been keenly scrutinized. Netflix raised flags in the second quarter when it added 2.7 million new subscribers, well short of its previous guidance for 5 million.
Diminished subscriptions and new streaming services next month from Apple and Disney prompted Raymond James analyst Justin Patterson on Monday to chop his price target on Netflix shares to $415 from $450. Patterson lowered his third- and fourth-quarter earnings per share and revenue estimates by 1%, though he maintained a Strong Buy rating on the strength of improving content library.
Rosenblatt Securities analyst Bernie McTernan is concerned that competition, in turn, will force Netflix to spend more than $15 billion on content over the long haul to maintain its market dominance, cutting into profits. He slashed his price target to $265 from $330 in an Oct. 8 note.
Influential media pundit Richard Greenfield, who just launched market research firm LightShed Partners, initiated coverage of Netflix last week with a Buy rating and $375 price target. He acknowledged investors are skittish about another subscriber miss and overly cautious fourth-quarter guidance, but Netflix’s vast content library and status as iconic entertainment hub make it a “unique buying opportunity heading into 2020.”
“As the cracks in the legacy media ecosystem become deeper and more visible with Netflix’s content slate ramping notably into Q4 2019 and 2020, our excitement for Netflix stock over the coming year has grown,” Greenfield wrote.