Investors dumped Netflix (NASDAQ: NFLX) on Thursday after the company missed its target for new subscribers in the 2nd quarter. The streaming service also lost U.S. subscribers for the first time since 2011. The stock fell more than 10%, closing near its lows.

There are now growing concerns that Netflix will struggle to grow in the future while at the same time it continues to burn cash. Despite yesterday’s selloff, the stock is still up 26% for the year. The current share price puts the stock on a trailing multiple of 127 and a forward multiple of 60, which would be difficult to justify if the company’s growth is slowing.

 

Subscriber Growth Overshadows Earnings

With new competitors launching Netflix no longer has pricing power, and margins will now come under pressure.

Netflix added 2.7 million users globally, well short of its target of 5 million. That still allowed the company to grow revenue for the quarter by 26% year-on-year which was in line with expectations. Diluted EPS of $0.60 were 4 cents ahead of consensus but down from the first quarter and from a year ago.

The other shock was the loss of 130,000 U.S. subscribers. The company attributed this to its price increase in January. Analysts believe the final season of Game of Thrones which aired on other networks contributed too.

CEO, Reed Hastings put a positive spin on things and said he still believes Netflix can add 7 million subscribers globally in the 3rd quarter. He also said the fact that Netflix will no longer be paying for content from Disney, as well as for The Office and Friends, gives it more cash to spend on creating original content. That may be true, but the company is still burning cash.

Netflix is a difficult call for the longer term. Around the world, customers are still switching to streaming services and, for now, at least, Netflix remains the market leader. The company has also managed to bounce back from numerous apparent setbacks ever since it listed in 2002.

On the other hand, new competitors including Disney Plus, HBO Max, and Comcast Flex will be launching over the next two years, no doubt creating new headaches for Netflix. This set of results shows that Netflix no longer has pricing power, and margins will now come under pressure.

Netflix may need to raise capital again in the future. Tech stocks are trading at lofty valuations and if investors turn off the sector it may not be as easy to raise capital as it has in recent years.

 

A Potential Trading Opportunity

The challenges Netflix will face in the next few years make it a risky bet given the valuation. However, if the stock falls further there may be a trading opportunity ahead of the next earnings season.

It’s quite possible that most of the subscribers that were going to cancel have now done so. Netflix also had very little new content out in the 2nd quarter but does have new content coming in the current quarter. Forecasting more than 6 months ahead would really be guessing, but there’s a good chance subscriber growth will bounce back this quarter.

From a technical perspective, today’s low tested a minor support level at $320. Below that, there may be some support at $300, but the major trendline is around $270. If that level is reached it would offer a better entry point ahead of 3rd quarter earnings.