ii view: shock at Netflix new subscriber numbers

Previous production disruption is now impacting content and demand. We assess prospects. 

First-quarter results to 31 March

ii round-up:

Shares of Netflix (NASDAQ:NFLX) fell by more than 10% in after-hours US trading as the global streamer reported net new subscriber of 3.98 million, and predicted net new customer adds of just one million for the current second quarter. 

That compares with nearly 16 million and 10 million adds in the first and second quarters of 2020. Management blamed both a pull through of demand, given the surge during the pandemic ,and the hit to current new shows given previous virus-related production disruption. 

However, Netflix expects subscriber growth to reaccelerate in the second half of 2021 as a backlog of new shows and movies become available. Average revenue per membership for the period, and aided by price increases, rose by 6% year-over-year, generating a record first-quarter revenue performance. 

Earnings per share of $3.75 were up from $1.57 a year ago, beating Wall Street forecasts of nearer $2.95 per share. It is also commencing a share buyback programme of up to $5 billion given expectation of turning cashflow positive over 2021. 

Management does not believe competitive intensity materially changed in the quarter. Netflix shares are up by more than 40% since pandemic induced market lows back in March last year. Shares for less pure but rival streamers Walt Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN) are up by around 110% and 75% respectively. 

ii view:

Started in 1997, Netflix today streams its TV and movie content to more than 190 countries. Overseas revenues during 2020 overtook those of its home North American market at around 55% of the group’s total. 

For investors, an expected tough second quarter and the ongoing uncertainty of the pandemic cannot be overlooked. The rollout of vaccines in key markets such as the US and UK may see consumers swapping the TV and sofa for restaurants and bars as Covid-19 restrictions ease. A forecast one-year prospective price/earnings (PE) ratio of around 55 compares with estimates of under 20 at both Comcast (NASDAQ:CMCSA) and ITV (LSE:ITV), suggesting the shares are not obviously cheap. 

But an expected move to being cashflow positive during 2021 now sees it commencing a share buyback programme of up to $5 billion, providing some share price support. Around $17 billion is expected to be spent on content this year, while management continues to embrace the competition from new entrants, believing it is a sign of growth in on-demand viewing as opposed to historical linear viewing. And a move to offer sport content could also occur at some point. In all, and given its first mover advantage, Netflix will likely continue to receive long-term investor support. 

Positives: 

• Share buyback programme of up to $5 billion
• Heavy investment already made in building a leadership position

Negatives:

• Growing competition from Disney, Apple and others
• Suffered programme making disruption due to Covid-19

The average rating of stock market analysts:

Buy