Netflix Plot Twist Was Foreshadowed

By Dan Gallagher

Previews are often not an accurate reflection of a show's quality. But Netflix nailed it three months ago in projecting its third-quarter results.

Those results, posted Tuesday afternoon, showed only 2.2 million net additions to the company's base of paid streaming subscribers. That was actually a bit below the 2.5 million Netflix projected, though it did reflect the great "pull-forward" the streaming giant has experienced with the coronavirus pandemic. Nearly 26 million paid subscribers were added to the company's rolls in the first half of the year, nearly equal to what Netflix averaged annually over the last three years.

Wall Street didn't fully believe that outlook. Analysts were estimating about 3.6 million additions for the third quarter, according to FactSet. The company's projection for 6 million new streaming subscribers for the fourth quarter also fell a bit short of Wall Street's 6.3 million target. The pandemic's freeze on productions boosted the company's free cash flow to a record $1.1 billion in the third quarter. But Netflix investors tend to focus solely on subscriber growth, and thus the stock fell 6% following the report.

Even given a flat performance since the company's first downbeat projection three months ago, Netflix shares remain up 62% for the year -- second only to Amazon among megacap internet names. So high expectations are still baked in, creating some risk heading into the new year against tough comparisons and an ultra-competitive field. The past 12 months have seen the addition of major new streaming services owned by companies like Disney, AT&T and Comcast -- all of whom have deep libraries and a strong incentive to pour more resources into their efforts. Disney is even under pressure from an activist to kill its dividend to free up more capital to make exclusive programming for its Disney+ service.

All will be hard pressed to catch up to Netflix, given its early lead and still-strong momentum. The company's disappointing fourth-quarter projection still reflects the addition of 34 million streaming subscribers this year -- record growth even as alternatives abound. The greatest competitive threat facing Netflix at the moment is comparison to its own recent past.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

October 20, 2020 18:20 ET (22:20 GMT)

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