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Dow Jones futures fell Monday morning, along with S&P 500 futures and Nasdaq futures, even with U.S. stock markets closed Monday in observance of the Martin Luther King holiday.
The stock market rally powered higher last week, with the Dow Jones, S&P 500 index and Nasdaq composite all reclaiming their 50-day lines. Among the large-cap stocks worth watching was also the Netflix which sold off Friday on mixed results and weak guidance, and now stands well below a current buy point but seems poised to carve a new, lower entry.
The subscription video-on-demand service added 8.8 million paying subscribers in the December quarter, bringing its worldwide total to 139.3 million. Netflix had forecast 7.6 million new paying subscribers.
The Los Gatos, Californian based company earned 30 cents a share on revenue of $4.19 billion during the period. Analysts expected Netflix earnings of 24 cents a share on sales of $4.21 billion. In the year-earlier quarter, Netflix earned 41 cents a share on sales of $3.29 billion.
For the current quarter, Netflix expects to add 8.9 million paying subscribers. It forecast earnings per share of 56 cents on sales of $4.49 billion. Analysts polled by Thomson Reuters expected Netflix earnings of 83 cents a share and $4.61 billion in revenue.
Netflix Chief Executive Reed Hastings said:
“As a result of our success with original content, we’re becoming less focused on second-run programming. In the U.S., we earn about 10% of television screen time and less than that of mobile screen time. We earn consumer screen time, both mobile and television, away from a very broad set of competitors. We compete with (and lose to) ‘Fortnite’ more than HBO. Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”
Netflix is leading the FAANG pack again since the start of the year, up 31%, and that’s good news for other risk-on assets.
The tech trade worked well—until it didn’t. In the second half of 2018, the FAANG stocks— Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix, and Google parent Alphabet (GOOGL)—lost their edge after a series of high-profile problems, along with a growing aversion to risk. As worries about global growth and trade dominated investors’ minds, tech lost out to sectors, like health care, that are perceived as safer.
Netflix is Raising Prices
Two days before the earnings report, Netflix announced a price hike for U.S. customers. The cost of its popular mid-tier plan will increase from $10.99 per month to $12.99 per month. The price of the premium plan – which supports 4K streaming and up to four simultaneous streams – will also increase by $2, reaching $15.99 per month. Finally, the basic standard-definition plan will cost $8.99 per month, up from $7.99 per month previously.
This is the fourth time the company has raised its subscription prices since it launched its streaming service, with the most recent in October 2017. Shares jumped 3 percent that day.
Wall Street analysts also don’t think this price hike will be a deterrent, saying customers are likely willing to pay more. And, in the past, most fans have not been put off by higher costs. Last quarter, Netflix reported domestic subscriber growth of nearly 11 percent year over year, for a final total of 58 million U.S. subscribers.
On the other hand, if the price hike causes domestic subscriber growth to slow dramatically, or even stop, Netflix will have to think hard before attempting any further price increases. It would then have to rely on international growth to push free cash flow into positive territory. In that scenario, Netflix would probably struggle to live up to its roughly $150 billion market cap.
Winning a new U.S. customer now costs Netflix more than four times what it cost a few years ago in terms of marketing spend. One factor is that the company is simply running out of households that don’t have a subscription or don’t use the account of a friend or family member. Another factor could be increased churn. Netflix doesn’t disclose how many users drop the service, so there’s no way to tell.
Not all of the increase in Netflix’s marketing spending was due to escalating customer acquisition costs. Netflix reclassified certain personnel costs in the fourth quarter, moving that spending from general and administrative to cost of revenues and marketing. That change didn’t affect the bottom line, since it’s just shifting numbers around. But it was one factor behind the increase in marketing spend.
Under the new classification system, general and administrative expenses were reduced by $199 million in the fourth quarter compared to the old classification system. About $83 million of that was shifted to marketing, with $30 million added to U.S. marketing spending and $53 million going to international marketing spending.
Netflix stock is currently 19% below its June 21 record high of 423.20. It’s 12% off its Oct. 2 peak, which could be interpreted as the start of a new cup base.