Interactive Investor

ii view: Netflix shares plunge after Q4 results

The share price has now fallen back to levels near the start of the Covid crisis. We assess prospects.

21st January 2022 11:27

Keith Bowman from interactive investor

The share price has now fallen back to levels near the start of the Covid crisis. We assess prospects. 

Fourth-quarter results to 31 December

  • New quarterly subscribers of 8.3 million giving a total of 221.8 million
  • Revenue up 16% year-over-year to $7.71 billion
  • Earnings per share of $1.33, down 64% year-over-year

Guidance:

  • Expects new subscribers of 2.5 million during the first quarter

ii round-up:

Global streaming media giant Netflix (NASDAQ:NFLX) reported fourth -quarter earnings which beat analysts’ estimates but forecast slowing future subscriber growth. 

New subscribers for the current first quarter to the end of March are estimated by management to be 2.5 million. That’s down from the 8.3 million additions made in this latest quarter, and down from the 3.98 million achieved in the first quarter of 2021. 

Netflix shares are down by more than a fifth today, taking them back down to levels not seen since the early pandemic in 2020. Shares for rivals Disney (NYSE:DIS) and Roku (NASDAQ:ROKU) are also lower. 

Netflix did point to intensified competition over the last 24 months as a factor for its slowing subscriber growth. But it also flagged Netflix growth in every country and region in which streaming alternatives had been launched. Management still believes that the transition from linear to streaming offers the biggest opportunity, with streamed TV in the US, its biggest market, still at under 10%. 

Netflix also suggested that it plans for a more back-end weighted content slate in the first quarter, with big premieres set for March, was a factor in its 2.5 million estimate of new subscribers for Q1 2022 compared to the 3.98 million added in the first quarter of 2021. Both series two of Bridgerton and its film The Adam Project are due for release in March. 

Broker Morgan Stanley downgraded Netflix to equal weight from overweight. It previously assumed that as content investments rebounded post pandemic, subscriber additions would too. Now it is assuming a base case of continued content spending growth but with more muted subscriber growth, lowering profit potential. 

ii view:

Started in 1997, Netflix today streams its TV and movie content to more than 190 countries. Overseas revenues have overtaken its home North American market, totalling around 56% of the group’s total in this latest financial year. More than 90% of its net new subscriber over 2021 came from outside its home North American region. Total paid net new subscribers during the full year 2021 of 18 million compares to 37 million during the heavy pandemic lockdown year of 2020.   

For investors, competition from the likes of Disney and Amazon (NASDAQ:AMZN) Prime remains intense. The influence of the pandemic on its performance continues to emerge with both subscriber numbers and production costs heavily impacted during 2020. Unlike rivals Comcast (NASDAQ:CMCSA), which owns Sky TV, and Apple (NASDAQ:AAPL), Netflix pays no dividend, while the debate of appropriate technology valuations continues more broadly. 

That said, potential for growth in streaming TV at the expense of more traditional linear TV remains. A move to offer sport content could also occur at some point, while Netflix bought video games maker Night School Studios during 2021 and has begun testing an online game offering in selected countries. In all, metrics for this media technology company are likely to stay volatile. Content success is very much key, as seen with Korean hit show Squid Game during the prior third quarter. But long-term growth potential arguably persists.  

Positives: 

  • Streaming TV services overall still growing
  • Potential to add sport content

Negatives:

  • Intense competition from Disney, Apple and others
  • Subject to currency movements given growing overseas customer base

The average rating of stock market analysts:

Buy

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