Why’s Netflix in the red?

Digest Newsletter

OK, Tell Me More?

Earlier this week, Netflix announced that it’s now home to 5.2 million new subscribers as of the second quarter of 2018. That’s 4% growth on its already impressive base of ~125 million strong.

Hmm, Go On?

In the United States, listed companies produce earnings results every quarter. Before the results are made public, analysts produce their own earnings forecasts that influence investors’ expectations. The fact that Netflix has been a growth stock for the past few years has only added to expectations – with its share price doubling in 2018 alone.

How’d Investors Respond?

On the day of the announcement, the share price dropped by 14%. You may be thinking that surely adding 5.2 million subscribers in a few months should work in the company’s favour – right, Friends? Well, investors didn’t see it that way. The market panicked when the company didn’t live up to their lofty and unsustainable expectations – apparently, they were hoping the party would never end.

Netflix has grown rapidly through its expansion into new countries. However, now that it’s been introduced throughout most of the connected world, winning over new customers has become slightly more challenging.

What About The Business?

Netflix has transformed itself from a service that mainly licenced shows from cable networks into a producer of its own original content. This shift has brought viewers award-winning series like Orange Is The New Black and Ozark. In fact, for the first time ever, Netflix originals have won more Emmys than HBO.

For the traditional investor who looks at cash flow, Netflix appears to be a black hole. The company raked in ~R157 billion in revenue during 2017, but they’re planning on spending ~R176 billion on new content for 2018. The gap here is ultimately funded by investors.

With Netflix now being so international, it also has to create more localised and culturally relevant content in each country it’s available. Since more content means more money, the light at the end of the tunnel remains firmly out of reach. It will be an interesting road ahead – but for now, we’re just waiting for the third season of Stranger Things.