Netflix gets clobbered on subscriber miss: 'The good old days may be gone'

·4 min read

The streaming wars are intensifying — and Netflix is bearing the brunt of the battle.

Shares of Netflix (NFLX) plunged more than 20% in trading Friday after the company reported fourth quarter results Thursday that reflected weakening subscriber additions — a key metric for investors that serves as an indication of its ability to grow, especially amid a backdrop of a rising number of formidable competitors.

Netflix accumulated 8.3 million subscribers in the three-month period ended December 31, above Wall Street’s forecast of 8.13 million, but below its own expectations of 8.5 million subscriber additions. Moreover, the streaming giant’s outlook for future net additions raised further concerns around how it will fare in an increasingly saturated market. The company forecasted a net add of 2.5 million subscribers in Q1 2022, compared to 3.98 million during the first quarter last year.

“The good old days may be gone,” Santosh Rao, head of research at Manhattan Venture Partners, told Yahoo Finance Live on Thursday. “Now they will really have to grind it out and compete neck to neck in terms of quality of content and get subscribers out there, so the next incremental subscriber is going to be hard to get.”

In a rare admission in its post-earnings letter to shareholders, Netflix acknowledged that competition may be “affecting marginal growth some,” though asserting the company was optimistic about its ability to expand internationally.

“In the long run, it’s still well positioned, but in the near term, the growth story has to be clarified,” Rao said. “How are they going to do it when subscribers are slowing down?”

Netflix shares fell 23.48% to $388.91 a piece as of 11:15 a.m. ET on Friday — its biggest decline since October 2014.

Questions around the company’s ability to compete with peers and grow its subscriber base escalated last week when Netflix raised prices on its North American plans in an effort to boost cash and help finance new programming. Netflix hiked its basic U.S. plan by $1 to $9.99 per month, the standard plan to $15.49 from $13.99, and its premium plan to $19.99 per month from $17.99. The company also raised fees on Canadian plans.

Netflix Chief Operating Officer Greg Peters said during a post-earnings call that “customers are willing to pay for great entertainment,” citing Disney+ and other streaming services as “endorsements” of Netflix’s own core theory that subscribers have typically been willing to allot more for subscription fees if it means better storytelling and more variety.

Although the price hikes were received positively by analysts, the read on Netflix’s fourth-quarter subscriber figures has now made some on Wall Street wary. Morgan Stanley’s Benjamin Swinburne, Tim Nollen of Macquarie Research, and Evercore ISI’s Mark Mahaney were among the names downgrading their rating and price target for the stock.

“Fourth-quarter results came in better than market fears and in-line with management guidance in terms of profitability,” Evercore’s Mahaney wrote in his note. “The issue is the first-quarter sub adds guide of 2.5 million, which was less than half of our/Street expectations, and easily the weakest first-quarter sub adds guidance in many years."

Netflix reported 221.84 million global paid subscribers as of the end of the latest financial quarter, just below its goal of 222 million. While the company still leads competitors in paid users — Amazon Prime Video has 175 million subscribers and Disney’s Hulu, Disney+, and ESPN+ have a total of 179 million subscribers — other streaming peers are quickly catching up.

That said, some analysts are not discounting Netflix just yet.

"This is not over. I think, is it a straight line? No ... I followed Netflix for a long time now. There has never been a simple answer to why they miss [expectations]," said LightShed Partners analyst Rich Greenfield on Yahoo Finance Live Friday morning. Netflix was "pretty honest. They don't exactly know all the pieces. I think what we do know is Netflix takes more shots on goal than anyone else."

He mentioned no one could have predicted that the Korean drama "Squid Game" would be a breakout hit and "a huge tailwind" for Netflix.

"There's still lots of growth to go," Greenfield said. adding that the conversion from linear TV to streaming television is still early on, which may bode well for Netflix.

“It’s hard to believe that with 220-odd million subscribers, that is the ceiling,” he said, adding that about 700 million homes in the U.S. have high-quality broadband that can support Netflix.

Similarly. Pivotal Research Group analyst Jeff Wlodarczak, who reiterated a Buy rating on Netflix, said, "In the end we think the Netflix flywheel is still working it is just operating at a slower pace given the massive pull forward of demand enabled by pandemic shutdowns and over time we expect normalization in subscriber results and for the stock to work."

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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