Tech

Netflix just missed hard on the only number that matters — international subscriber growth

Key Points
  • Netflix shares are down about 11 percent in after-market trading.
  • The reason Netflix shares are falling is because international net additions were 2.8 million. Analysts thought that number would be 4.8 million.
VIDEO6:4606:46
Netflix fell far short of new subscriber expectations—What's next?

Netflix shares are tanking almost 11 percent after-hours following the company's Q2 earnings report on Wednesday afternoon, but before you get wrapped up in false narratives, understand that Netflix trades on international growth.

The reason Netflix shares are falling is because international net additions were 2.8 million. Analysts thought that number would be closer to 4.8 million.

Netflix can sustain its lofty valuation only if global subscriber growth can support increasing content spending and debt. And growth is entirely dependent on Netflix's prospects internationally, in countries such as India and Malaysia. If Netflix misses by that much — 42 percent — on international net additions, the stock is going to get hammered.

The bigger question is why Netflix missed by that much.

"Stranger Things" season three picks up in the summer of 1985. The Hawkins crew are on the cusp of adulthood and faced with enemies old and new.
Netflix

The company is blaming a number of factors -- price increases in certain countries, a weak slate of original content in the second quarter, and a particularly strong first quarter that may have skewed results from March to June. Netflix is counting on a new season of "Stranger Things" to help with international growth next quarter.

But Netflix will clearly have to improve with country-specific hits as it focuses on local content. The U.S. narrative is fraught with challenges, including losing hit shows such as "The Office" and "Friends" in the coming years and fending off a slew of new streaming content from competitors such as Disney, Apple and AT&T's WarnerMedia.

Fortunately for Netflix, the U.S. doesn't really matter for the time being. The stock still trades on global customer growth, and Netflix is forecasting international subscribers to bounce back in the third quarter, with an estimated gain of 6.2 milllion. For the time being, it's really the only metric that matters.

WATCH: Netflix not growing as fast as Wall Street wants

VIDEO7:4507:45
Netflix isn't growing as fast as Wall Street wants and the stock gets hit