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Netflix chip excuse could be the start of a trend

Netflix on Wednesday attributed its weaker-than-expected earnings results, in part, to complications related to the country's transition to chip-based credit cards. The video-streaming provider said it saw involuntary service cancellations in the U.S. tied to its inability to collect reoccurring payments from members whose credit and debit cards were shifted to chip-based technology.

Netflix shares fell hard after the announcement as investors tried to make sense of the results. Meanwhile, some analysts found the explanation hard to believe, while others wondered if the company could be sounding the alarm on a difficult new trend for any subscriber-based business.

The company's explanation deserves some serious thought, said Steven Weinstein, senior technology, media and telecom analyst at ITG Investment Research, who said he trusts Netflix management.

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On the other hand, other Wall Street analysts, such as Wedbush Securities' Michael Pachter, who called the excuse "the dumbest thing I've heard," said they were unconvinced.

"I think it's probably a factor, but how much weight to put on it is what I'm wrestling with right now," Weinstein said in an interview with CNBC on Thursday. "We're still trying to make sense of it — does this mean there's a new trend for subscribers, or is this just kind of noise in the data."

Netflix headquarters in Los Gatos, California.
Getty Images
Netflix headquarters in Los Gatos, California.

Companies with similar subscriber models as Netflix' could have very well faced with similar complications during the third-quarter, according to Weinstein.

ITG said it isn't aware of other instances of the transition to chip technology impacting other businesses – in terms of the chip leading to new account numbers and failure in payment, "but it's early in the earnings season, so we'll see it its comes up more frequently," Weinstein said.

Providers of online subscriptions that tend to be used occasionally, and companies that supply nonessential services could be among those impacted, Weinstein said.

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Weinstein will be watching for signs in the corporate report of LinkedIn, along with a few companies that he doesn't cover, including Verizon, LifeLock, WWE and Sirius XM Holdings. "I'm interested in seeing what those companies have to say, so I can put the proper weighting on Netflix' comments."

FBR Capital Markets analyst Barton Crockett said the issue around the chip cards is particularly confusing, given that these cards have been around for a bit. "It begs a million questions," he told Reuters on Wednesday. U.S. credit and debit card companies have been upgrading to chip-enabled cards ahead of the Oct. 1 deadline mandated for the change. The technology is intended to stem fraud.

Netflix Chief Financial Officer David Wells said the subscribers shortfall was likely multi-factored.

"There may be other things going on here, but certainly the transition to the chip cards is not helping, and that has to be a factor in it," Wells said during the company's post-earnings conference on Wednesday.

The company said it expects U.S. banks to continue to issue new cards in during the fourth quarter, although they were supposed to be done in October.

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"They're about a third of the way through. So we'll continue to see that in the U.S., as we go along," Wells said.

Michael Nathanson, senior analyst at MoffettNathanson, pointed out that Netflix had a similar issue with churn last third quarter, which was around the time when the retail industry was dealing with fallout from a data breach at Home Depot, but the company managed to bounce back in the following quarter.

In a research note on Thursday, Nathanson said there were more pressing areas of concern, such as the company's cash burn and its long-term ability to license off-network hit content from traditional media companies.

The Los Gatos, California, company said it had 43.2 million total U.S. subscribers last quarter, below its estimate of 43.5 million when it released second-quarter results.

Wall Street appeared to take the news hard, sending Netflix shares tumbling 9 percent in midday trading on Thursday. However, the stock is still up more than 100 percent on the year.

"Unless the reasons for the shortfall are more significant than what they've talked about," this quarter doesn't really change much, Weinstein said. Netflix says it will continue to invest heavily into international growth and it expects that to be the majority of subscriber growth over the next few years.

— Reuters contributed to this report.