The run-up in Netflix (NFLX) ahead of its earnings report ended when Netflix posted weak subscription growth. While the streaming giant grew its user base at the beginning of the pandemic lockdown, that pace slowed considerably in the second quarter. What happened?
Netflix posted revenue growing 25% Y/Y to $6.15 billion. It added 10.09 million subscribers and now has 192.95 million. For the third quarter, it forecasts global streaming paid memberships growing 23.4% Y/Y to 195.45 million. The user base is exceptional and the additions suggest the company need not worry about AT&T’s HBO offering or Comcast’s (CMCSA) Peacock service.
Valuation is Netflix’s Big Problem
Markets did not care about high valuations so long as Netflix stayed ahead of the competition. But the P/E of over 100 times is unsustainable if investors no longer want to pay a premium for Netflix shares. Plus, Netflix will have to add even more subscribers for the rest of the year to attract investors.
On the balance sheet, debt growth is a concern. Netflix must raise debt to pay for content. And that content must keep subscribers from leaving the service and trying something else, like Disney’s (DIS) Disney+.
Disney+ has a good library of material that appeals to family and children. Netflix still buys and produces edgy, original content. Its prudent investment in captivating material will justify its valuations for longer.
