Netflix a Wall Street darling again as it confounds its own pessimistic forecasts

It's smart to under promise, over deliver, but having smashed its own subscriber forecasts by 2m Netflix took this to the extreme and made itself look silly 

James Moore
Wednesday 17 October 2018 11:04 BST
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Orange is the New Black: One of Netflix's flagship dramas that contributed to a bravura third quarter
Orange is the New Black: One of Netflix's flagship dramas that contributed to a bravura third quarter

Just three months ago Netflix was doomed. Show’s over, they declared, and investors switched off the stock as if it were a bad drama, knocking 15 per cent of its value.

Today it’s hotter than third season of Stranger Things (would you just give us a release date?), with Netflix having smashed both Wall Street’s and its own subscriber forecasts.

If anyone needed a(nother) demonstration of the folly of paying too much attention to a single shaky set of three month numbers it’s here.

Netflix’s guidance called for 5m net new subscribers to be added to the pile during the last quarter. The number came in at a smidgeon under 7m, a new record for the July to September period.

“As a reminder the quarterly guidance we provide is our internal forecast at the time we report and we strive for accuracy in our forecast,” said boss Reed Hastings, in anticipation of taking flak for the company’s prior pessimism. “This means in some quarters we will be high and other quarters low relative to our guidance.”

Well, duh.

To under promise, over deliver, is smart. The trouble is that Netflix took it to such an extent that it’s made itself look a little silly, particularly given that there were good reasons for thinking that the third quarter would be better than the disappointing second.

Its slate looked a lot stronger for a start, with original content highlights including a new season of Orange Is The New Black, one of its flagships, as well as another run out for animated comedy BoJack Horseman and the second season of crime drama Ozark.

Netflix continues to invest heavily in its own shows, with more than a quarter of the $8bn it is spending on content going to the home team. That means it’s burning through cash at quite a clip, but the move is wise.

Competition for externally produced fare is hotting up with a raft of new entrants seeking to join the streaming party, some in the US, but plenty elsewhere too. They may make it more expensive to buy things in, and could chip away at Netflix’s numbers,

But with the way it’s steaming ahead, and with the performance of Netflix originals at the Emmys, there is every reason to believe that the streaming giant will cope.

With that in mind, the bulls were back in the ascendent on Wall Street, and Netflix shares leapt. Part of the reason for that was the firm’s forecast for the fourth quarter, which calls for 9.4m new additions.

That looks quite challenging, and could be seen as a reaction by Mr Hastings to the low ball third quarter estimate. He’ll get kicked again if he fails to deliver on it, regardless of his warning over putting too much faith in internal forecasts. So will the stock.

So do yourself a favour and write this out 100 times: I will not fixate on the quarterly numbers. Then write it out again. Wall Street won’t, and nor will the media, but if you do, you’ll be able to make some money by jumping in the next time Mr Hastings gets egg all over his face.

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