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What’s Denting Netflix’s Revenues?

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Netflix posts soft revenues

Netflix (NFLX) posted weak revenues of $4.18 billion in the fourth quarter of fiscal 2018, marginally missing the Wall Street estimates of $4.2 billion. Though revenues increased ~27.4% year-over-year backed by strong growth in subscribers in the quarter, the company anticipates sluggish growth in the subscriber additions in the US for the first quarter, which is making investors cautious about the stock. The company predicts first-quarter earnings to be $0.56 per share on sales of $4.49 billion. Analysts have estimated earnings of $0.58 on sales of $4.52 billion in the first quarter.

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Netflix’s subscriber trend

The company added 8.8 million paying subscribers in the fourth quarter, beating the company’s forecast of 7.6 million subscriber additions and analyst expectations of 7.5 million subscriber additions. The US paid subscriber additions of 1.53 million and international paid subscriber additions of 7.31 million also exceeded the estimates of 1.4 million and 6.1 million, respectively.

However, for the first quarter of 2019, the company expects soft growth in US paid subscribers. Netflix anticipates 1.6 million subscriber paid additions in the US, lower than the analysts’ expectation of 1.86 million additions probably due to price hikes announced for new US members recently.

Price hike to boost ASP and revenues

The company has recently increased its US membership prices for new members by 13% to 18%, notably the most significant price hike in the past 12 years. The new revised pricing is expected to impact the existing members over the first and the second quarter. The pricing is expected to increase the average selling price (or ASP) of the company, which would, in turn, boost the company’s revenues. Higher pricing is also expected to help the company reduce its debt load related to huge investments in content. The ASP increased 3% in the fourth quarter as compared to 8% growth in the third quarter and 14% growth in the second quarter.

Competition to dent revenues

Netflix is also anticipating stiff competition in the streaming space from both the established as well as new players. Like Netflix, Amazon’s (AMZN) Prime Video, Hulu, AT&T’s (T) HBO Now, Alphabet’s YouTube are popular streaming service providers. To step up the competition, Walt Disney (DIS) and AT&T’s WarnerMedia are also launching their streaming services in late 2019. Comcast’s (CMCSA) NBCUniversal is also debuting with its streaming service in early 2020.

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