What’s Wrong with Netflix?

Information is not investment advice

It seems like the current period isn’t that great for Netflix. After publishing the Q1 report, the streaming company’s shares fell 26% during preliminary trading in New York on Wednesday. Later it said it was losing customers for the first time in a decade.

What happened?

Netflix reported worse-than-expected results on Tuesday evening. Investors were expecting Netflix to report a slowdown in subscriber growth in the Q1, but the results were even worse. Netflix lost 200,000 subscribers last quarter, marking the first time in more than a decade it actually lost customers. The company’s exit from Russia also cost it 700,000 customers. Additionally, it was mentioned that maybe its higher subscription prices might frighten some viewers.

However, it looks like things could get even worse as the company expects to lose another 2 million subscribers this quarter. Because investors use subscriber growth to measure the future profitability of Netflix, it doesn’t give much hope.

Earnings results

Overall, Netflix projected 2.5 million subscriber growth in the first quarter, roughly in line with Wall Street estimates. For the current period, analysts had forecast earnings of $2.43 million. First-quarter revenue rose 9.8% to $7.87 billion, falling short of analysts' estimates. Earnings of $3.53 per share easily beat the forecast of $2.91.

What can it lead to?

If the decline continues, the streaming leader's market value will depreciate roughly $40 billion overnight, making it the worst-performing stock of the year on S&P 500 and Nasdaq 100 indices.

Losing 2 million subscribers next quarter is a huge setback for a company that has grown regularly by 25 million subscribers or more a year. This is happening as consumers around the world are cutting back on life's little luxuries to cope with rising prices - a decision made even more urgent by the rise in streamer prices.

Another important Netflix’s problem is that people continue password exchanges. The company said that more than 100 million households use its services and don’t pay for them, in addition to 221.6 million subscribers. The company is experimenting with ways to register such viewers, such as asking people who use someone else's account to pay more. Fighting password sharing is a risk for a company. They started out by providing customers with a cheaper, more convenient alternative to cable television. By pushing customers to pay and inserting ads, Netflix began to resemble what it replaced.

Finally, analysts believe that Netflix can offset non-existent subscriber growth by selling ads on its platform, as HBO Max has already done and Disney+ is planning to do. In fact, they think Netflix could make up to $3 billion in additional revenue if it follows other companies’ steps. However, Netflix CEO Reed Hastings declines this idea.

Bottom line

Netflix is still well ahead of most of its competitors outside the US and is the largest streaming service globally. The company believes it can find a way out of its current setback by attracting new customers with better programs and finding more ways to charge its existing user base.

FBS Analyst Team

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