Netflix Narrowly Misses Subscriber Target In Q4; Stock Tumbles

·4 min read

Netflix narrowly missed subscriber forecasts for the fourth quarter, reporting a worldwide total of 221.84 million.

The year-over-year gain of 8.3 million subscribers in the period ending December 31 fell just shy of company and Wall Street predictions for 8.5 million. Netflix also said Thursday in releasing its earnings that it expects to have 224.3 million subscribers by the end of the current quarter, which would be a gain of fewer than 2.5 million new customers — that also appears to be dampening investor enthusiasm.

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Earnings per share handily topped forecasts at a diluted $1.33, while revenue was in line with expectations at $7.7 billion.

The results sent Netflix stock down nearly 20% in after-hours trading. It closed the regular trading day at $508.25, a decline of 1%. After hitting all-time highs last fall, it has tumbled to its lowest level since last spring amid broader pressure on tech stocks and questions on some investors’ minds about its ability to stay ahead of the streaming pack.

In its letter to shareholders, the company said the subscriber guidance, which is lower than the 4 million adds in the first quarter of 2021, “reflects a more back-end weighted content slate.” The second season of Bridgerton, for example, and marquee original film The Adam Project will both debut in March. “In addition, while retention and engagement remain healthy, acquisition growth has not yet re-accelerated to pre-Covid levels,” the letter noted. “We think this may be due to several factors including the ongoing Covid overhang and macro-economic hardship in several parts of the world,” such as Latin America.

Most of the subscriber growth has been recorded outside North America for several years now, but the fourth quarter showed a surprising uptick in the region. Some 1.2 million new customers came aboard, the best domestic showing since the early days of the pandemic in 2020.

Netflix faces mounting competition, especially in the U.S., where Disney, WarnerMedia, Apple and others have rushed into the subscription streaming business in the past two-plus years. As it looks to continue stepping up spending from the $17 billion it laid out in 2021 for programming, Netflix last week phased in its second price hike in the U.S. in the past two years. At $15.49 per month, its most popular plan is now at the top of the market.

“Even in a world of uncertainty and increasing competition, we’re optimistic about our long-term growth prospects as streaming supplants linear entertainment around the world,” the shareholder letter asserted.

Some of the financials affirm Netflix’s upbeat view of its prospects. Even though growth was more spectacular during the pandemic year 2020, the company has managed to become more profitable and has declared it will not need to borrow money in its expected cash-flow-positive future. Operating margins in 2021 hit 21%, compared with 18%, in line with the company’s goal of increasing it by three percentage points a year.

On the programming front, the company has taken a significant lead on rivals in terms of local-language production and cross-promoting it across its vast footprint. Korean series Squid Game, released just before the fourth quarter but a major force during it, quickly became the most-viewed series in the history of Netflix. It was the No. 1 show in dozens of territories, sending a signal to the rest of the streaming field about the progress Netflix has made since its global push began in 2016.

Exchange rates are an issue for Netflix, however, and will be for all U.S. companies with overseas operations. A strong dollar erodes the value of revenue in foreign currencies. (Higher U.S. interest rates, or the anticipation of them, is one thing that boosts the dollar, and several rate increases are expected this year to combat rising inflation.)

“The U.S. dollar has strengthened meaningfully against most other currencies. With ~60% of our revenue outside of the U.S. due to our international success, we estimate that the U.S. dollar’s appreciation over the past six months has cost us roughly $1 billion in expected 2022 revenue (as a reminder, we don’t hedge),” Netflix said in the shareholder letter. “With the vast majority of our expenses in U.S. dollars, this translates into an estimated two percentage point negative impact on our 2022 operating margin. As we have written in the past, over the medium term we believe we can adjust our pricing and cost structure for a stronger U.S. dollar world.”

Netflix will likely to be asked about the subscriber miss and the recent North American price hike (which it didn’t address in the letter) during the company’s quarterly earnings interview. Unlike most corporations, which convene a conference call and field questions from numerous analysts, Netflix records a video conference moderated by a single analyst and posts it to YouTube. Returning as moderator today for the fourth consecutive quarter will be Nidhi Gupta of Fidelity Management & Research.

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