Netflix shares sink as company sees subscriber growth slowing

Video streamer Netflix cites competition and a ‘Covid overhang’ for its prediction of a much smaller number of new subscribers this quarter. Its shares fell sharply.

Many analysts expect much of Netflix’s growth in the coming year to come from international viewers. Above, the Netflix building on Sunset Boulevard in Los Angeles. Picture: AFP

Netflix said it expects to add a much smaller number of subscribers this quarter than it did a year ago as it adjusts to growing competition and lasting disruptions from the coronavirus pandemic, sending the video streamer’s shares down sharply.

The company on Thursday forecast an increase of 2.5 million subscribers in the current quarter, compared with four million a year earlier. It also slightly missed its subscriber estimate for the fourth quarter, adding 8.3 million subscribers instead of the projected 8.5 million.

Netflix stock fell 20 per cent in after-hours trading, while shares of its main streaming rival, Walt Disney Co, were down 3.4 per cent.

Netflix’s subscriber miss came despite a strong content line-up of movies and TV shows in the quarter including new seasons of “The Witcher” and “You.” New movies that performed well included the political satire “Don’t Look Up,” which recently broke the company’s record for weekly viewership.

In its letter to shareholders, Netflix said its subscriber growth rates have “not yet re-accelerated to pre-Covid levels.” The company said among the reasons for that is an “ongoing Covid overhang” and economic difficulties in several parts of the world including Latin America.

“Covid has introduced so much noise,” said Netflix Chairman and Co-Chief Executive Reed Hastings during the company’s video call to review its results. He played down the near miss in subscriber growth, while Ted Sarandos, co-CEO and content head, said the company didn’t see any reductions to its engagement or subscriber retention.

“All the fundamentals are pretty solid,” Mr Sarandos said.

Still, the results aren’t what Mr Hastings was expecting last October when he predicted a big end-of-the-year finish for the company because of the return of hit shows and new movies including the action film “Red Notice.”

“We have so much content coming in Q4 like we’ve never had,” Mr Hastings told analysts at the time.

The lower subscriber projections for the first quarter come despite the scheduled return in March of “Bridgerton,” one of its biggest hits, and “The Adam Project,” a much anticipated time-travel-themed movie starring Ryan Reynolds and Jennifer Garner.

Additional competition also may be a factor, the company said. In the past, Netflix has tended to play down the competition it is facing from newer streaming platforms including Disney’s Disney+ and AT&T’s HBO Max.

Disney+ saw a bump in app downloads in December thanks to releases such as “Hawkeye” and “The Book of Boba Fett,” as did ViacomCBS’s Paramount+ with drops such as “Clifford the Big Red Dog,” “Mayor of Kingstown” and the “Yellowstone” prequel “1883,” said UBS analyst John Hodulik.

Last week, Netflix increased the price for its monthly plans in the US and Canada, the first such boost from the streaming platform since 2020. Netflix isn’t raising prices across the globe. It cut prices in India last month where it has struggled against strong competition in a market it sees as crucial for growth.

The company cited programming expenses as the primary reason for the price increase.

While Netflix has always spent heavily on content, growing streaming competition is driving the company to flood the market with new shows and movies. At the same time, Netflix is cancelling shows faster than it used to. New programs have a shorter window to prove themselves than in previous years, producers who work with Netflix said.

Netflix’s revenue rose 16 per cent to $US7.71bn in the quarter, in line with analysts’ projections. The company’s quarterly earnings were $US607.4m, or $US1.33 a share, compared with a profit of $US542.2m, or $US1.19 a share, a year earlier. Analysts were targeting 83 cents a share.

The operating margin for the quarter was 8.2 per cent, down from 14.4 per cent a year earlier — a drop the company attributed to its expensive programming line-up for the previous three months.

Netflix said it would be cash flow positive for the full year of 2022.

A large chunk of the new subscribers were in Europe, the Middle East and Africa, which added 3.5 million subscribers. In the US and Canada, Netflix added 1.2 million, up slightly from the same period a year ago.

Many analysts expect much of Netflix’s growth in the coming year to come from international viewers.

To attract new audiences, Netflix is expected to spend more creating content in those markets. “This international growth will increase pressure for the company to develop more and more localised content, with content costs continuing to rise in lock-step with subscriber growth,” said Michael Pachter, an analyst at Wedbush Securities.

In the US, Netflix’s subscriber growth has slowed in recent years, which Mr Hastings said was frustrating. He said getting two-thirds of the US pay-TV audience to sign up for Netflix was less challenging than getting the remaining third to do so.

Mr Hastings attributed some of that challenge to Netflix’s lack of live news and sports. He said if the company can land 80 per cent of the US pay-TV market, “that’s a good accomplishment.”

The Wall Street Journal