Netflix Is Hot. The Competition Is Not. Yet.

Netflix's profit quadrupled but Wall Street was looking for stronger subscriber growth.

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Stephen Chernin / REUTERS

Cast member Robin Wright arrives at the premiere of Netflix's television series "House of Cards" at Alice Tully Hall in the Lincoln Center in New York City January 30, 2013.

Netflix is often touted as the future of the television business — but the future isn’t here just yet. After watching its stock price climb by a whopping 184% so far this year, the online video service reported Monday that new subscriber growth failed to increase by as much as Wall Street analysts had expected, prompting investors to sell the stock in after-hours trading.

Still, Netflix’s profit quadrupled on solid revenue in the most recent quarter, suggesting the company is growing at a healthy clip, even as competition in the online video space is intensifying. In addition to Netflix rivals like Hulu and Amazon Prime, both Apple and Google are said to be weighing new online video services. And of course, there’s Aereo, the upstart online video company that’s been giving broadcasters fits as it eludes their efforts to shut it down.

For now at least, Netflix has a leg up on the competition, but it needs to keep growing its subscriber base to maintain its advantage. “The world is moving from linear TV to Internet TV and Netflix is leading that evolution,” Netflix CEO Reed Hastings and CFO David Wells wrote in a letter to shareholders. The company reported a 26% increase in streaming revenue.

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Despite the heavily hyped return of “Arrested Development” and the introduction of popular original series like “House of Cards” — which was nominated for several Emmy awards, in a first for an online-only program — Netflix added a disappointing 630,000 new subscribers last quarter, short of the 700,000 subscribers Wall Street analysts predicted, and below the high-end of the company’s own forecast of 880,000. Netflix now has 29.8 million streaming customers.

“The stock was priced for perfection going into the quarter, hence the sell-off,” Evercore Partners analyst Alan Gould told Reuters. “They didn’t beat on the subscriber numbers.” In comments to the Associated Press, Pacific Crest analyst Andy Hargeaves added: “It was a very good quarter, by most standards, but that doesn’t cut it when your stock has risen by 200 percent.” Netflix reported $29 million in profit on revenue of $1.07 billion. The company added 610,000 new subscribers in markets outside the United States.

The second quarter of the year is typically Netflix’s weakest for new subscriber growth, because people watch less programming as the summer gets underway. But that dynamic was offset somewhat by the May debut of the fourth season of “Arrested Development.” “This show already had a strong brand and fan base, generating a small but noticeable bump in membership when we released it,” Hastings and Wells wrote.

Netflix predicted that it could add between 690,000 to 1.5 million U.S. streaming customers this quarter, but that forecast “looks a little light,” Gabelli & Co analyst Brett Harriss told Reuters. “Netflix needs to add a substantial amount of subscribers to justify the current valuation,” he said. The company said it forecasts profit between $18 million and $34 million next quarter.

(More: News Corp. Threatens to Pull Fox Off the Air in Aereo Dispute)

In their letter to shareholders, Hastings and Wells emphasized the fierce competition in the still-nascent online video space. They specifically cited HBO Go, which is now available on Apple TV, as well as Hulu and Amazon Prime Instant Video, which both license exclusive content that isn’t available on Netflix, as well as develop their own original programming. On a video call with analysts and investors, Netflix execs acknowledged that increased competition could drive up the price of content, which would increase Netflix’s costs.

Hastings and Wells touted the solid reception that the company’s original programming has received from consumers and critics, including “Lilyhammer,” “House of Cards,” “Hemlock Grove,” “Arrested Development” Season 4, and “Orange is the New Black.” The execs said that Netflix has ordered second seasons of all its first season projects, and said that the company would be “delighted to produce a fifth season of Arrested Development, if possible, given fan reaction.”

“We are thrilled to have the Netflix Originals nominated for 14 Emmys, with House of Cards earning nine nominations including Outstanding Drama, Arrested Development garnering three, and Hemlock Grove two,” Hastings and Wells wrote. “We couldn’t be more proud and pleased for the series creators, actors, composers, designers and others who are being recognized by their peers for the excellence of their storytelling on Netflix.” They said that Netflix would soon be expanding into feature documentaries and stand-up comedy specials.

3 comments
Adam'Palmlix'Palmer
Adam'Palmlix'Palmer

LOL I love how quadruple growth still isn't enough. This is the world we live in!

Potemkin
Potemkin

And I love there is no mention that Time-Warner is trying to buy half of Hulu, or that Time-Warner is already heavily invested in Hulu.  And that Netflix's 14 Emmy noms was noted as being just "several." 

Netflix is Time-Warner's competition, makes sense that they'd write negatively about Netflix.  But I'm not sure that it qualifies as proper journalism.  I'ts more like on-line advertising.

gysgt213
gysgt213

Netflix is doing great.  Enter Wall Street to fix that.