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Netflix Inc. (Nasdaq: NFLX) stock plummeted more than 25% in afterhours trading today (Wednesday) after the company's Q3 earnings report showed lackluster subscriber growth.
NFLX added just 980,000 U.S. subscribers during the quarter, well below analysts' prediction of 1.37 million. Globally, the company added 3.02 million subscribers. Netflix had previously predicted 3.69 million new global subscribers.
"This quarter we over-forecasted membership growth," the company said in a letter to shareholders. "We'll continue to give you our internal forecast for the current quarter, and it will be high some of the time and low other times."
Netflix did report Q3 earnings per share (EPS) of $0.96. That beat estimates of $0.93 per share. However, revenue came in at just $1.22 billion, which was also below expectations of $1.41 billion.
Forward guidance figures were also disappointing. Company officials predicted EPS of just $0.44 for the fourth quarter, compared to analysts' estimates of $0.84.
Following the afterhours drop, NFLX stock has now dipped 31.5% from the 52-week high it hit in September.
The sell-off wasn't the first bad news of the day for Netflix. Earlier, NFLX shares dropped 4% after HBO announced its own standalone streaming service. It will be available in 2015 and adds another direct competitor for Netflix.
However, the company did not seem phased - at least publicly - and responded in its letter to shareholders.
"Since our per-member viewing and retention in the U.S. are as strong as ever, we don't think increased competition from piracy, TV Everywhere, Amazon Prime Instant Video, Hulu, etc., is a major factor," company officials said.
While today's sell-off is concerning, the worst part for shareholders is that NFLX missed on this figure in today's earnings report...
NFLX Stock Drop: The Most Important Miss
Netflix announced that it added just 2 million international subscribers this quarter. That was well below the 2.39 million international subscribers many analysts had predicted.
Here's why that miss was so brutal...
In mid-September, Netflix launched in France, Germany, Austria, Switzerland, Belgium, and Luxembourg.
"We've been building up to this for a long time," Netflix Chief Executive Officer Reed Hastings said in September. "This is the biggest international expansion we've ever done, so it is hugely important."
The Research firm IHS Technology recently estimated those six markets will result in 5 million to 6 million new subscribers by 2018. Now, Netflix is already behind on those goals.
Netflix's European expansion has also not come cheap. For the third quarter, NFLX reported international losses of $31 million. That was up from a loss of $15 million the previous quarter.
And that loss occurred during a quarter when international revenue actually grew 12.7%. It was up $307 million last quarter to $346 million this quarter.
Missing domestic subscriber growth estimates is a bad sign, but missing internationally is even worse for shareholders - especially after the company has been trumpeting the importance of the European market.
"International subscriber growth is the most important variable driving stock performance for the foreseeable future," Morgan Stanley analyst Benjamin Swinburne said in a research note.
Revenue isn't the only reason subscriber growth is so important to Netflix. The bigger the company's user base, the more attractive Netflix is to content producers.
Netflix already has powerhouse programs like "House of Cards" and "Orange Is the New Black," but wants to keep expanding its offerings. This month, Netflix announced a partnership with Adam Sandler for four feature-length films. The company also plans to remake the 2000 film "Crouching Tiger, Hidden Dragon."
Netflix stock has been shaky for weeks. Before today's sharp drop, NFLX had slid 6.4% since Sept. 10. At today's afterhours price, NFLX has now erased all of its gains from 2014.
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