Netflix Shares Plummet 25% on Subscriber Losses: What Investors Need to Know
April 20, 2022
During the Covid-19 pandemic, millions of us reverted to staying indoors and watching content offered up by streaming giant Netflix Inc (NASDAQ: NFLX).
Unsurprisingly, the company has enjoyed a splendid couple of years in terms of that crucial metric for streaming firms; net new subscribers.
Yet Netflix investors would have been cringing early this morning after its stock price cratered 25% in after-hours trading, following the streaming giant’s latest results.
So, was it really that bad for the dominant streaming firm? Here’s what investors need to know.
Setting records…of the wrong kind
First off, the headlines were bad for Netflix. It ended a decade-long run of subscriber growth by posting net subscriber losses of 200,000 accounts.
However, this came with a caveat. Since it suspended and then exited its Russia business, Netflix had to absorb the loss of 700,000 subscribers.
Without that, Netflix would have actually added 500,000 net new subscribers in the first quarter of 2022.
Perhaps what really spooked the market was the fact that Netflix said it expects to lose an additional two million net subscribers in the current quarter.
Adding to the gloom was the fact Netflix actually lost a net 640,000 subscribers (see below) in the US and Canada (UCAN).
Source: Netflix Q1 2022 shareholder newsletter
For all the talk of the international opportunity for Netflix, UCAN remains the biggest region by revenue share – contributing around 43% of overall sales during the quarter.
Netflix CEO Reed Hastings did say on its earnings call that the firm aims to introduce a lower-tier, ad-supported subscription offering.
On the financials front, Netflix saw revenue hit US$7.87 billion in the first quarter of 2022, up 9.8% year-on-year.
Operating income for the quarter was US$1.97 billion, broadly flat year-on-year while free cash flow for the period was US$802 million – up 16% year-on-year.
Asia a bright spot
The Asia-Pacific region did remain a bright spot for Netflix as it added a net new 1.09 million subscribers in the region as it expands aggressively into India.
Management did also highlight that while it has 222 million subscribers, an extra 100 million are using shared accounts, including around 30 million in UCAN.
That could mean a crackdown on the pretty care-free sharing of Netflix accounts up until now, offering the firm an extra lever to generate more revenue.
Netflix did raise subscriber prices in UCAN by US$1.50 for its standard plan in January of this year, which was most likely at least one of the reasons for subscriber losses.
Can it stanch the subscriber bleeding?
While the Netflix content train appear to be “full steam ahead”, the competition is heating up.
In that sense, spending on content is going to continue rising and – as I’ve written about recently – that shows no signs of slowing given the rise of Walt Disney Co (NYSE: DIS), HBO Max and many others in the streaming world.
More importantly, can Netflix stop subscriber losses in the coming quarters? Admittedly, I believe it has the most compelling content offering among all the streaming services so if subscribers do drop subscriptions, Netflix will most likely be the last one they would cut.
However, beyond that, investors do have to ask whether this company can return to the high-growth days of the past decade now given higher competition and penetration. That’s a question that remains to be answered.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.