Netflix Posts Slowing Subscriber Growth in Q2

Netflix NFLX reported a mixed second quarter as subscriber growth remains anemic due to the pull forward in demand during the first half of 2020. Subscriber additions were well ahead of guidance, but revenue was in line with our projections for the quarter. While management expects adds to accelerate to 3.5 million next quarter, this mark is well behind our previous expectation of 6.9 million. We think the firm is experiencing not only saturation in its largest markets but also strong competition in the regions with the most potential growth, as we previously expected, and continue to expect. As a result, we keep our narrow moat rating and $250 fair value estimate.

Netflix posted subscriber growth of 1.5 million net adds, with a net loss of 430,000 in the U.S., versus guidance of 1.0 million. It slowly increased its streaming base, ending the quarter with more than 209 million global paid subscribers, up 8% from 193 million a year ago. Customer net adds posted their lowest quarter since the second quarter of 2013 when the firm only had 35 million paid subscribers globally. Growth in the quarter was slower across the four regions with the U.S. losing subscribers for only the second time since the start of 2012. Europe also experienced a very stark slowdown with only 0.19 million net adds, the first time it has added fewer than 0.75 million since the start of 2018, when Netflix began releasing regional breakdowns.

On the call, management outlined its strategy for entering the video game industry as Netflix recently hired Mike Verdu, a video game executive at Facebook and EA previously. Netflix will offer mobile games as part of its subscriptions starting in 2022. We see the effort as a distraction at best from the core business. Much larger firms have struggled to make an impact in the space with very large budgets and their own platforms. Additionally, most major gaming franchises are based on original intellectual property or sports licenses, as the days of movies launching with game tie-ins have largely died off.

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