Netflix Stock Takes Another Dive As Streaming Giant Posts Q1 Subscriber Reversal

Netflix shares plummeted more than 20% in after-hours trading after the company announced that it actually lost ground in terms of subscribers, falling to 221.64 million around the world.

Usually, the question when Netflix reports numbers is about how many new customers it managed to acquire. This time, its global subscriber base declined by 200,000 from where the company ended 2021, a rare reversal and far from the internal projection of 2.5 million additions in the period. It’s the first negative move for subscriber levels in more than a decade, and the pain isn’t likely to end anytime soon. Netflix also said it expects to post a loss of another 2 million in the current, April-to-June quarter.

Wall Street analysts expected 2.51 million new subscribers to join the Netflix rolls, which would already have been a weaker growth rate than the company has seen in recent quarters. But losing subscribers was not what even bears ventured to predict.

The Street also had expected more from the streaming giant in term of revenue, with a consensus among analysts calling for $7.93 billion. Netflix reported $7.868 billion, up less than 10% from a year ago, with earnings per share falling 6% from a year ago to $3.53. The EPS figure, at least, handily exceeded analysts’ expectation for $2.90.

Investors punished Netflix’s already beaten-down shares, sending them below $270 after hours after they finished the regular trading day at $348.61, up 3%. They have lost more than 40% of their value in 2022 amid a broader rotation out of tech stocks and concerns about Netflix’s growth potential. A similar pattern followed the company’s previous quarterly earnings report last January. After softer-than-expected numbers, shares plunged by more than 20%, where they have essentially remained in the months since.

The Netflix numbers were clearly weighing on streaming rivals but nowhere near the extent that investors are currently punishing the DTC leader. Disney, Warner Bros. Discovery and Paramount Global all ended higher in today’s session but are now all down between $3 and $5 in after-hours trading.

“Our revenue growth has slowed considerably as our results and forecast below show,” the company said in its quarterly letter to shareholders. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration – when including the large number of households sharing accounts – combined with competition, is creating revenue growth headwinds.”

Netflix in recent times has been reluctant to acknowledge the impact of numerous multi-billion-dollar competitors like Disney+, HBO Max, Apple TV+ and Peacock. In this quarter’s letter, though, there was a more clear-eyed acknowledgement of the crowded marketplace. “Over the last three years, as traditional entertainment companies realizedstreaming is the future, many new streaming services have also launched,” the company said. “While our U.S. television viewing share, for example, has been steady to up according to Nielsen, we want to grow that share faster.” Of total time spent streaming via a TV screen, Netflix represented 6.4% in February 2022, up from 6% in May 2021, according to a Nielsen chart included in the earnings letter.

Russia’s invasion of Ukraine as well as ongoing effects of Covid are also hurting results, the company said, estimating the impact at about 700,000 subscriber losses in the period. Netflix, like many companies, decided to suspend operations in Russia due to the invasion after having developed local-language production and a small subscriber base there.

In a multi-part statement addressing the revenue and subscriber stagnation, the company cited “factors we don’t directly control,” such as connected-TV trends and data costs. “We believe these factors will keep improving over time, so that all broadband households will be potential Netflix customers,” the shareholder letter said.

In its previous earnings report in January, Netflix warned that results in the first quarter could be a bit soft. The company blamed a “back-end weighted content slate,” with titles like Bridgerton‘s second season and The Adam Project both launching in March, giving them less time to boost the quarterly numbers. Acquisition growth, Netflix said, is still affected by Covid and “macro-economic hardship” in regions like Latin America.

While Netflix continues to hold a strong subscriber lead in the overall streaming race, it faces more competition than ever from the likes of Disney, Warner Bros Discovery and several others.

As its North America business has plateaued, Netflix has responded by pursuing several initiatives. Earlier this year, it phased in the latest price hike, making its most popular subscription tier, at $15.49, the most expensive in the market. It also began testing a surcharge for sharing passwords in three Latin American countries. It’s a potential prelude to a global effort to crack down on the practice, which costs streaming purveyors billions in revenue.

The shareholder letter said determining “how best to monetize sharing” would be a priority, with Netflix estimating that more than 100 million households currently use another household’s account, about 30 million of them in the U.S. and Canada. “This is a big opportunity as these households are already watching Netflix and enjoying our service.”

The company has also ramped up its efforts in video games and interactive programming, looking to enhance subscription offerings and keep any restless customers from canceling. A deal announced yesterday for Exploding Kittens is a sign of the times, as it includes plans for both a game and a series based on the property.

Globally, of course, Netflix has room to grow and again reaffirmed that its programming strategy with shows like Squid Game — produced in one local market but aimed at the entire world — gives it a competitive edge.

A scrap of good news for Wall Street was free cash flow, which amounted to $802 million vs. $692 million the year before. The company continues to expect it will be cash flow positive for the full year 2022 and beyond.