This most recent bout of volatility may say more about the firm’s soothsaying abilities than the strength of its underlying business. Although Netflix’s subscriber growth fell short of its own projections, it was still in line with that of past quarters (see chart). In percentage terms, Netflix registered a bigger miss against projected subscriber growth in the second quarter of 2016, when its shares fell by 13%. The firm has also had much bigger forecasting misses on the upside.
When asked this week to explain the forecasting error, Netflix’s chief executive, Reed Hastings, responded that the company never worked out what happened in 2016 either, “other than that there is some lumpiness in the business”. It is possible that subscriber growth fell short of expectations because none of the shows Netflix released last quarter captivated audiences in the way that past hits such as “House of Cards” have. Data from Metacritic, a review-aggregator, show its users gave Netflix shows released in the past quarter an average score of just 6.4 out of 10, well below the online streamer’s historical average of 7.2.
Markets nonetheless have reason to be jittery about Netflix, if only because it has some of the priciest shares around. The company’s price-earnings ratio sits at around 170, and its annual cashflow is negative to the tune of billions of dollars. The firm’s rise has mostly come on the back of the promise of future growth. It is producing an astonishing amount of content—this year alone, it plans to spend some $12bn-13bn on it, including 82 original or exclusively licensed feature films and hundreds of television programmes. Warner Brothers, a major Hollywood studio, plans to release just 23 films.
Critics have applauded; over the whole year, Netflix captured 112 award nominations, the first time it has beaten its arch-rival, HBO. Investors will fret that much production has been financed by borrowing. The firm’s long-term debt has risen to $8.3bn, up from $2.4bn just two years ago (and equivalent to more than half of Netflix’s total revenue of $14bn over the past year). Any indication that the firm’s growth rate is slowing causes concern.