Netflix has hit a speed bump with original series and movies, and it could spell bad news for investors (NFLX)

Netflix CEO Reed Hastings

Netflix has bet that its original series will draw in new subscribers and help retain older ones.
But the company released a relatively weak lineup of Netflix Originals in the second quarter, at least compared with last year.
That light release schedule could translate into worse-than-expected subscriber numbers for its second quarter, warned Wedbush's Michael Pachter.

If Netflix missed its subscriber targets for the second quarter, you can blame its lineup of original series — or, to be more accurate, the holes in that lineup.

The streaming media giant released few notable Netflix Originals in the its most recent quarter, noted Michael Pachter, a financial analyst who covers the company for Wedbush, in a research note Wednesday. And the company's lineup looked particular lacking when stacked up against the same period a year ago, when it released new seasons of such high-profile original series as "Orange is the New Black" and "House of Cards."

That could be problematic for the company and its investors when it reports its second-quarter results Monday. Netflix has bet big on using original shows to draw in and keep new subscribers. But with little new of mass appeal in the offing in recent months, the company could have had trouble luring in US customers, warned Pachter, a persistent pessimist when it comes to Netflix's stock.

"We expect domestic net subscriber additions ... to fall below our estimate," Pachter said.

While new international subscribers may make up for the shortfall, Netflix's stock may take a hit anyway, he said.

"Netflix shares have historically reacted negatively to domestic subscriber misses," he said.

And this may not be a one-quarter event. At least right now, Netflix's release schedule for the third quarter for its Originals is looking similarly light, with fewer seasons announced for release so far than debuted in the same period last year and fewer notable series. That could play out in terms of the company's guidance for the third quarter.

"Should guidance for Q3 net subscriber additions fall below last year's Q3 additions, Netflix shares may react even more negatively," Pachter said.

In the last two months of the second quarter of last year, Netflix had a particularly strong slate of new shows. In addition to the new seasons of "Orange is the New Black" and "House of Cards," it also released new seasons of "Master of None," "The Unbreakable Kimmy Schmidt," and "Bloodline," noted Pachter.

That lineup paid off in terms of subscribers. Netflix added 1.07 million net new US customers in the second quarter last year, up from just 160,000 in the same period a year earlier.

In the same period this year, the company's releases were far less impressive. The only really notable shows — in terms of potential mass appeal — it released this May and June were the second season of "13 Reasons Why" and the first half of the fourth season of "Kimmy Schmidt." And the new season of "13 Reasons Why" was problematic, drawing far fewer positive reviews than the first season, Pachter noted.

Netflix's second-quarter releases "lacked virtually all of the critically acclaimed and mass appeal launches that made up last year's ... slate," he said.

But while the company's Originals lineup was weaker than last year's, investors have been expecting the company to post significantly better subscriber gains. In its first-quarter report, the company forecast that it would add 1.2 million US subscribers in the second quarter, and Pachter himself had projected it would add 1.25 million.

But the company may have a tough time hitting those targets, he said. And if it doesn't even hit last year's total, look out.

In that case, "We expect Netflix shares to decline," he said. And things could be even worse if the company offers a disappointing outlook for third-quarter subscriber additions, Pachter said.

Netflix's lineup of Originals in the third quarter last year was much less impressive than its second quarter one and so easier to improve on, Pachter said. But the announced schedule so far still looks a bit light. Last year, the company added 850,000 US subscribers in the third quarter on the backs of new seasons of "Ozark," "Narcos," "Marvel's The Defenders" and "Club de Cuervos."

This year, the company is countering with new seasons of "Orange is the New Black" and "Ozark." Netflix has been spending billions of dollars to produce and develop original programming. The company expects to recognize $7.5 billion to $8 billion in content expenses on its income statement this year and to see an outflow of cash totaling some $3 billion to $4 billion.

In his report, Pachter reiterated his "underperform" rating on Netflix's shares and his $125 price target. In late trading on Wednesday, Netflix's stock was trading at $419.54, up $3.89, or 1%.

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