Netflix Disappointed by Drop in Subscribers and Higher Costs, but Share Collapse is Overdone

Netflix (NFLX) reported its Q4 2021 and 2021 FY earnings. The company projected it would add 2.5 million customers from January through March, less than half of the 5.9 million analysts had forecast.

In reality, the world's largest streaming service added 8.3 million customers from October to December, when it released a heavy lineup of new programming including the blockbuster movies "Red Notice" and "Don't Look Up" and a new season of "The Witcher" serial. The consensus estimate was for 8.4 million.

The company's global subscriber total at the end of 2021 reached 221.8 million.

However, shares of Netflix plummeted nearly 20% to $408.13 in after-hours trading. Competitor Walt Disney Co (DIS), which has staked its future on building a strong streaming business, saw its shares drop 3.8%. Streaming device Roku (ROKU) fell 5.6%. Let’s see what investors didn’t like about the streaming companies’ numbers.

In terms of NFLX’s financial results, Revenue rose to $7.7 billion (+16% YoY) – in line with consensus-forecast. Operating income reached $632 million (-33.8% YoY); but Operating margin dropped heavily to 8.2% (previously 14.4%, and in Q3 2021 23.5%). Net profit stood at $607 million (+12% YoY), while EPS of $1.33 beat Wall Street estimate of $0.83. There were no share buybacks in 2021. In 1Q 2022, the company expects revenue of $7.9bn (+10.3% YoY) and EPS of $2.86 (-23.7% YoY).

Netflix disappointed the market by its weaker growth forecast. Once again, this quarter, only 2.5 million new subscribers are anticipated, against market expectations of 6.3 million. The company explains such weak growth by the premiere schedule, the main projects will be released in March, closer to the end of the quarter and will not have time to attract new users. Okay, according to this logic, the second quarter should be strong. Then why panic and sell shares in the postmarket?

We saw two issues in July: the rise in content production costs and slight drop of users in North America. The company tackled the second issue, returning to a minimum growth of 1.7%. But the first one remains intact, and it is much more important than growth in the US and Canada. The ratio of spending per user has a big impact on Netflix valuation. A 10% change in its forecasts can translate into a 20% change in the value of the company. Given that, the weak growth forecast for the current quarter can be explained not only by the schedule of premieres, but also by growing competition. However, after a 20% drop in share price, Netflix's valuation became quite compelling to buy.