When Netflix (NASDAQ:NFLX) disappointed investors back in April with its miss on Q1 subscribers and Q2 guidance, the shares dropped sharply.
Since then we’ve seen a slow recovery in the Netflix share price, although we remain below the April highs which preceded the announcement. Tuesday's Q2 numbers with respect should have been a low bar for investors in the wake of the lowering of guidance to 1m users, from 4.4m.
The key benchmark for Netflix in the wake of the increasing competition from the likes of Disney+ (NYSE:DIS), Apple (NASDAQ:AAPL) TV+, the Warner Media/Discovery merger, and Amazon (NASDAQ:AMZN) paying $9bn for the MGM back catalogue, for its Prime offering, is very much in international markets, and its growth potential there.
While its US market is pretty much saturated, and very much given to churn, on a global scale Netflix remains very much the market leader with nearly 210m subscribers.
Today’s Q2 numbers saw 1.54m new subscribers, coming in above estimates, it still gave the company its worst start to the half year since 2016.
For Q3 Netflix went on to downgrade subscriber estimates from 5.86m to 3.5m.
On the revenues front the picture was more positive, coming in slightly ahead of expectations at $7.34bn, while profits missed slightly, coming in at $2.97c a share. Estimates for Q3 still pointed to improvements in revenues with an estimate of $7.48bn and upgrading profits to $2.55c
While improvements on the revenue front show that Netflix is proving effective in maintaining a steady cashflow, there appears to be some doubt that the company will be able to achieve break even this year, even if that remains its ambition. Full year operating margins are still expected to come in at 20%.
It is becoming quite clear that while revenues are continuing to rise Netflix is feeling the heat from the increasing competition of its peers. So far it has been able to pass on price increases and still grow its user base, with most of the new subscribers coming from the APAC region.
Netflix is also growing its foreign language content, with Lupin from France its most popular non English title, and while the slate has been light so far this year, it still plans to spend $12bn on new content this year, with new seasons of Stranger Things, Lost in Space and The Witcher keenly awaited.
Yesterday’s numbers may have been a little disappointing from a user growth point, however, there appears little sign that revenues are slowing, and the scope for user growth, particularly in international markets still looks positive, even when measured from a 2019 perspective.
With the addition of streaming video games on mobile devices in the coming months, the potential for management to grow and diversify the business towards a younger cohort, as well as existing users can’t hurt either.
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