Netflix Is Joining the Gaming Community

Netflix Inc NFLX has maintained a wide subscriber edge in an increasingly crowded streaming playground that includes rivals Walt Disney Co. DIS, Apple Inc. AAPL, AT&T Inc. T, Comcast Corp. CMCSA and Amazon.com Inc. AMZN. But after reporting worst quarter yet for new subscribers on Tuesday, the streaming giant revealed rebound won't be as fast as Wall Street expected as executives expect the undergoing quarter to have fewer additions than Wall Street saw coming. In after-hours trading, shares dropped 3% following the announcement but then bounced back close to even. The stock is up 1% so far this year, whereas the S&P 500 index gained 16.5%.

Second Quarter

While Netflix added fewer new subscribers, it made more money because it increased subscription prices. It earned $1.35 billion which translates to $2.97 a share, which is a great increase from $1.59 a share a year ago. However, it came below FactSet-pooled expectations of $3.18 a share. Revenue increased 19.4% to $7.34 billion and managed to barely beat the estimates of $7.32 billion. Co-chief executive Reed Hastings emphasized that keeping revenue growth at 20% is a success, elaborating that revenue growth was a result of increases on two fronts: 11% in average paid memberships and 8% in average revenue per membership. 

COVID-19 Distorted Comparisons

1.54 million net new paid subscribers in the quarter was the company's lowest quarterly total yet. But it did manage to beat its own as well as the average analyst forecast. However, these gains came from overseas as its home base, US and Canada, subscriber total shrank for the second time since these figures started being reported. But these additions look even smaller when compared to last year's figures when COVID-19 pandemic kept people indoors, treating Netflix with than 10 million net new subscribers in the same quarter.

Outlook

For the third quarter, Netflix projected 3.5 million net new paying subscribers will join its userbase of 209.2 million and this is not what Wall Street wanted to hear. According to FactSet, analysts were aiming for 5.5 million new subscribers in the third quarter, wrapping the year with 9.64 million new subscribers in the final quarter.

Chief Financial Officer Spencer Neumann acknowledged a drag on user-acquisition growth but stated he expects a rebound in the fourth quarter for Netflix to end the year on a "normalized growth trajectory. Much of the optimism comes from the upcoming content which has been pushed back into the second half of this year and 2022. Netflix spent $8 billion in cash on content alone during the first half of 2021. In simple words, it is saving the best for last as Gal Gadot, Dwayne Johnson, Ryan Reynolds, Leonardo DiCaprio, Jennifer Lawrence, Cate Blanchett, Jason Momoa and Meryl Streep are just some of the names that carry its repertoire. If anyone can make a home run for the once streaming king, it's these stars.

Gaming

Netflix recently welcomed Facebook's FB vice president of augmented reality and virtual reality content Mike Verdu. Like its expansion into original films, animation and unscripted TV, Netflix is expanding its horizons. Potential games will be included in Netflix subscriptions at no additional cost, with the initial focus on mobile games.

Branching Out Beyond Its Traditional Offerings

It's clear Netflix is looking to grow and diversify its offerings, but like any major change, it will take some time. It's important to note that the company is facing pressure from tough YoY comparisons since last year Covid-19 pandemic created an unprecedented demand for in-home entertainment. 2020's explosion in user growth led to a massive pull forward in new subscribers and left Netflix to deal with difficult comparisons this year, throwing expectations out of whack as a result. What matters is that it is focused on improving its service for its members which is the best long-term strategy there is.

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