Trading Nation

Netflix just had its worst day in three years – 7 experts on what comes next

Netflix fell far short of new subscriber expectations—What's next?

Netflix is not so chill right now.

For the first time since 2011, Netflix reported a loss of 126,000 U.S. subscribers in its most recent three-month stretch. International subscribers increased by only 2.7 million, far below expectations of 5 million.

Shares dropped more than 10% on Thursday, a day after the report came out.

With a handful of other streaming services getting ready to compete for Netflix's market share, there is a lot of uncertainty in how the 'streaming wars' play out. Here's what seven experts think comes next.

Paul Hickey, co-founder of Bespoke Investment Group, sees a bright future in the fourth quarter even after this disappointing earnings report.

"To be fair, their subscription numbers often vary widely from estimates... Normally, they're much better, so this is not great news. But, just a little-known fact [is] that the second-quarter earnings for Netflix have been historically the worst for the stock. It averages a decline of 6% when it reports second-quarter earnings. Fourth quarter is the best quarter for the stock... I think it's seasonality... So, it's a weak quarter, but in our survey work that we've done, we were interviewing consumers about this. 59% of Netflix subscribers have used it in the last 24 hours. So, it's very sticky competition — they're looking at Disney Plus as more of a compliment as opposed to competition for the service. And low single digits view "The Office" or "Friends" as a requirement for Netflix... I like to think of those things as the bread when you go out to a restaurant. It's there, everybody eats it, but at the end of the day that's not what you're buying."

Ritholtz Wealth Management CEO Josh Brown says he doesn't think Netflix can make up for the loss of big shows such as "Friends" and "The Office."

"Do you buy the argument that they're going to free up budget and easily replace things like "Friends" and "The Office"? Because I got to tell you, those shows were made in a different era where you can reasonably produce 23 episodes a season, and do that for eight seasons. That is a lot of shows. The new Netflix shows, it's like six episodes, they're an hour long each — and they cost probably five times as much. So, I don't know that you can just say, 'Oh well, we're not going to pay content and licensing fees, we'll just make the next "Friends.'"

Bernie McTernan, vice president at Rosenblatt Securities, says in the era of "binge watching," Netflix needs to focus on pushing out content.

"They're increasingly focused on churn-reduction strategies — and that's going with comedy specials, with movies, and documentaries... "Stranger Things" was great, but the problem is it's hard having 12 of those a year. And then with Netflix increasingly encouraging binge-watching, you need 52 of those a year to really hold on to subscribers. So, Netflix made a very difficult game for streaming and media companies, but now they need to play in that sandbox."

Gene Munster, founder of Loup Ventures, says with more streaming services launching, the best days of Netflix are behind it.

"I don't like to pile on when things are negative, but I just want to try to have a most clear view of what's going on. And what's happened, even if you account for a pull-forward, that they didn't give proper guidance for, this is negative. We're going to look back at this quarter as one of the pivotal moments in the Netflix story. I think the key insight here is that the content lineup that they had in the June quarter just simply didn't get the job done. We can talk about what's coming in terms of competition, but ultimately that is the tip of the spear of this story. When you put a layer on top of that content, things are going to get more difficult when you layer on top of that the valuation, and I want to enumerate that 52 times next year's earnings, and that's on this lower stock price. Compare that to Apple at 15 just as a point of reference... I think we will look back at this quarter as representative of the best days of Netflix are behind it."

Mark Newton, founder of Newton Advisors, says the stock is likely to keep going down and investors should pay attention to buy on the dip.

"When you take a look at the longer-term chart, it's really interesting, because the stock has really gone nowhere over the last six months, obviously lagging other FANG stocks like Facebook [and] Amazon. Today's move is going to put this under the lows of this entire range going back since the beginning of the year... When you look at the longer-term picture, this is really interesting, because the stock really has been beginning, what I view, as a longer-term consolidation triangle. So, getting down near $275 is really the area I would pay attention to and look to buy on dip. So, if it's under $322 by Friday, my thinking is it is going to show further losses to come."

Lee Horowitz, vice president at Evercore ISI, says the weak growth in subscribers shows Netflix needs to invest more heavily in content.

"Well, obviously, it was a big subscriber miss in the quarter — and it brought about two very important questions for us that we think investors are contemplating today. Netflix's ability to raise price in lieu of rising competition. We saw elevated churn in this quarter from the price increase as well as its ongoing need to invest in content. The company called out, you know, their inability to meet their subscriber estimates based on what was seen to be a weaker content slate. So, to us, that shows the need to continue to invest heavily in content... We don't think their [price increases are] too hard to do, but perhaps the magnitude that we saw in this quarter won't be as large as we move forward. And perhaps the time between the next price hike might be a little bit longer."

John Blackledge of Cowen says Netflix needs to be strategic in when to next hike prices.

"They'll probably think about the cadence of price hikes relative to what quarter they should do it. Reed Hastings also said last night that net adds in 2019 will be greater than 2018, and we think there's a path for that and the path would be the subtrends to start Q3 are very strong. They're accelerating gross net adds, probably led by "Stranger Things" and also higher retention, and they also have an incredible content slate in the back half of the year."