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Netflix shocks the market

by LLT Editor
21st Jan 22 9:35 am

When Netflix released Don’t Look Up, was it trying to second guess what would happen when its fourth quarter numbers came out? The share price is doing exactly what was instructed by that film title – it’s looking down to the tune of a 20% decline in after-hours trading,” says Danni Hewson, financial analyst at AJ Bell.

Fourth quarter earnings were well ahead of forecast and 8.3 million net new subscribers were better than the market consensus of 8.1 million, albeit less than the 8.5 million guided by Netflix.

Yet the big news was guidance for subscriber growth to slow massively, which therefore drags down earnings expectations and puts a question mark over Netflix’s goal to be cash flow positive every year from 2022.

“Netflix spends a massive amount of money on content to attract and keep viewers, so essentially as soon as those subscription payments come in, they’re out the door again to pay for big TV and film productions. Basic business sense means it must bring in more money than is being paid out, but film financing is not straightforward and there are always lots of moving parts,” said AJ Bell’s Russ Mould.

“The pandemic essentially brought forward a lot of subscriber growth, so Netflix must now face the reality that earnings growth is becoming more dependent on regularly raising prices, not simply hoovering up millions of more subscribers every month.

“In 2017 Netflix’s co-CEO Reed Hastings brushed aside talk that rival streaming providers would come and catch up with it, saying ‘we compete with sleep and we’re winning.’ Those words have come back to haunt him.

“The streaming market is now very competitive and in some markets like North America growth is becoming much harder to achieve because so many people are already signed up to Netflix and a host of other platforms.

“A lot of new subscribers are now coming from outside the US and Canada, with Asia Pacific a key region for growth – however, the average revenue per member for Netflix in these places is a lot less than North America.

“It looks Netflix might have to load up a new spreadsheet and start redoing its maths to see what the long-term earnings model might look like if growth expectations are significantly pared back.”

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