Netflix Will Be Just Fine

Shares of Netflix Inc. (NASDAQ: NFLX), which had traded in nosebleed territory, sold off viciously when the company announced second-quarter earnings that were less than expected. Lost in the frenzy was the fact that the company has 130 million subscribers worldwide, a number not so far above its competitors that it has an unimaginable lead.

Investors were offended that Netflix only added 5 million subscribers worldwide during the period, compared to the first quarter of the year. In the United States, subscriber numbers were up by only 670,000 to 54.4 million. Nevertheless, Netflix revenue was $3.9 billion, up from $2.8 billion in the second quarter of 2017, which points to the issue of whether the fairest comparison is with the immediately previous quarter or with the one a year ago.

The extraordinary part of the results is that the company is growing at all, given how much it has increased prices to subscribers. Netflix could fairly make the case the health of the top line is driven by slowing demand against rising subscription rates. Given that Netflix is spending hundreds of millions of dollars on original programming, revenue is the better measure. Netflix net income in the second quarter was $384 million, compared with $66 million in the second quarter of 2017. While the margin is still razor-thin, the improvement should be welcome.

Netflix management opened their letter to shareholders with a double-edged sword:

We had a strong but not stellar Q2, ending with 130 million memberships. Membership growth was 5.2m, the same as Q2 last year, but lower than our 6.2m forecast. Earnings, margins, and revenue were all in-line with forecast and way up from prior year. Internet video is growing globally and we are fortunate to be one of the leaders.

Not one of the leaders. The clear leader.

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