Must-know: Why Netflix stock fell so steeply

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Oct. 20 2014, Updated 1:48 p.m. ET

Netflix disappoints with lower subscriber growth

Netflix (NFLX) announced its 3Q14 earnings on October 15. The results disappointed investors, as they came in short of expectations. Netflix’s stock declined by more than 25% in the after-market hours of trading, which wiped off about $7 billion from the company’s market cap. Netflix added fewer than 1 million net U.S. subscribers last quarter against its own expectations of 1.3 million. The subscriber additions were also considerably fewer than the 1.29 million net additions in the corresponding quarter a year ago, as the chart below shows.

Another disappointing factor was the company’s outlook for 4Q14, which was also below expectations. Netflix mentioned that it’s estimating 1.85 million net U.S. subscriber additions in the next quarter—much lower compared to the 2.33 million additions it achieved in 4Q13, as the chart below shows.

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Netflix blamed the slower subscriber growth on the price increase that the company undertook recently. A few months back, Market Realist published a series on Netflix’s 1Q14 earnings titled Netflix will raise its prices after better-than-expected earnings. We discussed how Netflix planned to raise the price of its streaming service by $1 to $2 per month for new subscribers from the present rate of $7.99 per month.

Competitive dynamics have also changed for Netflix

In addition to price increases, competitive dynamics against Netflix have also changed over the last few months. On October 15, Time Warner (TWX) announced that it will offer consumers the option of subscribing to its HBO channel as a standalone online streaming service. This was an interesting move from Time Warner as it looks to grow its business after it spurned a takeover attempt from Twenty-First Century Fox (FOX)(FOXA) earlier this year.

A day after, on October 16, CBS (CBS) announced its own online streaming service named CBS All Access. This service will provide users access to CBS programming online. Amazon (AMZN) has also started to aggressively beef up its original video content. It recently acquired Twitch to challenge Netflix and Google (GOOG)(GOOGL) in the video streaming market.

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