Streaming nose for Netflix as shares tumble 26%

Investors turn away, as higher prices and tougher market conditions lead the streaming service to miss its internal targets.

by Adam Gale
Last Updated: 16 Oct 2014

If any Netflix executives left the office yesterday thinking everything was just dandy, they’ll be waking up to a headache this morning. Shares in the online streaming business lost 26.4% of their value in after-hours trading yesterday following disappointing results. They closed at $448.59 (£287.63), up 22% over the year, but fell back to $330 after the bell was rung.

Shareholders took the huff after boss and founder Reed Hastings wrote them a letter, saying that subscriber growth had fallen well short of expectations in the third quarter. Only 3.02 million people signed up worldwide over the last three months, it seems, resulting in a shocking year-on-year revenue rise of 38%, to $1.22bn, and profits of $59.3m, barely 85% higher than the third quarter of last year.

You’d have thought sending a letter (quite sweet, really) with numbers like those would have wooed anybody, but the markets respond to surprises and they didn’t like this one. Netflix had predicted an additional 660,000 new subscribers, meaning it missed its target by nearly 20%.

At the same time, the costs of its streaming obligations to studios rose 37% on the same period last year, leading Netflix to revise its earnings forecast for next quarter down by 44%. Perhaps Hastings should have sent flowers.

Netflix blamed the weaker-than-expected take up of its service on a $1 increase in the monthly subscription costs to $8.99 and said that earnings should increase once the steep costs of launching in Europe fade and its business there becomes profitable.  The company was also quick to point out that missing its targets was, like, no big deal anyway.

‘For the prior three quarters, we under-forecasted membership growth. This quarter we over-forecasted,’ the letter said, adding growth ‘will be high some of the times and low other times.’

There is possibly another reason for the investors’ reaction. Cable giant HBO announced on the very same day that it was planning to launch its own online streaming service, HBO Go. Perhaps the notion of exclusively-streamed Game of Thrones marathons made Netflix seem somehow less attractive.

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