Netflix Inc missed Wall Street forecasts for new subscribers and offered a weaker-than-expected forecast for early 2022 as rivals ignited a dispute over TV viewers.
The world’s largest streaming service added 8.3 million customers from October to December, when it launched new programming that included star-studded movies like “Red Notice” and “Don’t Look Up” and a new season of “The Witcher.”
This news has caused Netflix shares to fall 20% in just one day, last Friday. What’s happening on Netflix? Isn’t it a bit of an exaggeration that it loses so much stock value if it continues to grow? Why has the company lost 40% capitalization since November?
Industry analysts had expected Netflix to add 8.4 million, according to Refinitiv IBES data. The company’s total global subscribers reached 221.8 million.
Days ago, Netflix raised prices in its biggest market, the United States and Canada, where growth is stagnant, analysts say, and is now looking to expand abroad.
The company rode on a rollercoaster ride during the pandemic, with strong growth in early 2020 as people stayed home and movie theaters were closed, followed by a slowdown in 2021.
Netflix captured more than 36 million customers in 2020 and 18.2 million in 2021. In 2022, Netflix’s subscriber growth is expected to level off and return to its pre-pandemic pace, according to analysts.
The company’s upcoming lineup includes new installments of “Ozark,” “Bridgerton” and “Stranger Things” and a three-part Kanye West documentary.
But its competitors, such as Walt Disney Co and HBO Max, are pouring billions into creating new shows to grab a piece of the streaming market.
Netflix reported fourth-quarter revenue of $7.71 billion, in line with estimates.
Netflix is expected to spend $18 billion on content this year, according to Morgan Stanley estimates, as it seeks to maintain its lead over competitors such as Disney Plus, AT&T’s HBO Max, Apple TV Plus, ViacomCBS’s Amazon Prime Paramount Plus and others.
The 8 main audiovisual companies in the United States have in mind to spend at least 100,000 million euros in new movies and television programs to try to cope with streaming.
As the Financial Times points out, this huge outlay is mainly due to concerns that attracting new customers will be really difficult, especially after the growth driven by the pandemic in 2020 and 2021.
Is streaming a good business?
But it seems that this is not the main problem of Netflix right now, but that its own business model is in doubt. Investors seem to realize the high cost of the streaming business and the short life of content. Following the Netflix report, analysts at Moffett Nathanson noted that the “rate of deterioration” of streaming content was “incredibly fast,” especially when popular programming can be seen in a single night.
This means Netflix has to spend a lot of money creating new content to keep its subscribers happy, so “any slowdown in spending translates into a weaker quarter” for subscriber growth, according to the report.
“We wonder if streaming is a good business,” said Michael Nathanson, an analyst at the company. “It requires a ton of fresh content.” Netflix said its higher spending on content squeezed operating margins to 8 percent in the fourth quarter, down 6 percentage points from a year earlier.
Increasing their margins significantly would mean spending less on content, which many see as unlikely given the intensity of competition in the streaming market. This month, Netflix has raised its prices in the US to $15.50, up from $14 before.
Netflix officials noted last week that subscriber churn had slowed in the fourth quarter, and said plans to break even and deliver free cash flow this year were on track.
Netflix, Disney and other streaming companies racked up huge subscriber gains during the 2020 shutdowns, but a return to a more normal routine has slowed growth.
But Martin says Netflix was underestimating the impact that increased competition will have on subscription growth. “Part of the problem is that Netflix doesn’t think they have a problem,” he said. “I’ve come to the conclusion that the competition is real, but they haven’t come to that conclusion yet.”
He said that the streaming market would become more stable once there was a period of consolidation, which he believes will be in three years or sooner. “Three (streamers) have to go bankrupt and three have to survive,” he said. And then the contents can be more reasonable in terms of price.
For his part, Reed Hastings, CEO of the company, said there was no reason to question the trajectory. “We remain calm,” he said. The question that the stock market is asking is, Until when?
