Netflix investors need to learn to ignore short-term volatility and look at the bigger picture.
Across the board, it was a solid Q4 performance from the reigning streaming leader. However, guidance for the first quarter is what sent investors into a frenzy in the after-hours session Thursday.
Netflix said it expected just 2.5 million global paid sub additions in the first quarter compared to the 4 million subs added in the first quarter of 2021. Wall Street had high hopes and anticipated guidance for more than 6 million subscriber additions in Q1.
Netflix stock hemorrhaged 20% after hours shedding nearly $100 per share on the weak outlook. Its market cap fell by more than $40 billion.
Investors are growing fearful that weaker subscriber growth at any capacity will put it in a less favorable position in the streaming wars as competition is at all-time highs.
As for the final quarter in 2021, the streaming giant met Wall Street's topline estimate and crushed consensus estimates for the bottom line. Netflix added 8.28 million global paid subscribers, up from 4.4 million additions in Q3.
And surprisingly, the streamer grew subscribers at home in the U.S. and Canada by 1.2 million. Growing subs at home has been one of the biggest challenges for Netflix in recent quarters given the maturity of the service.
Investors’ fears are certainly understandable. However, Netflix’s strategy has stayed the same, and it has kept them at the top thus far. It is still committed (for now) to continue growing its business through its content library.
The content slate is stacked for 2022, and the company predicts a more normalized content release schedule this year compared to last year (unless COVID causes unforeseen challenges). But the issue is that some highly anticipated content won’t be released until the very end of Q1 making it a less rosy picture for sub growth in the quarter. Season two of popular series “Bridgerton” will be released March 25, so the sub growth driven by the show would be reflected in Q2 results as opposed to Q1.
Netflix has no plans to slow down spending on precious content. Spending that it plans to fuel with its expected positive free cash flow in 2022. Free cash flow that will be partially boosted by higher ARPU which is driven by price increases.
But that’s not to say Netflix doesn’t have a lot to prove to quell growing investor fears. For one, it’s such a focused business, which is why analysts and investors are so hyper-sensitive to subscriber growth. It’s not like they have an advertising business to draw in cash. It’s up to the subscriber additions to bring in revenue. Sure, Netflix may be making moves in gaming, but it’s not enough to move the needle for a while.
One thing is for certain: Netflix investors’ patience is wearing thin.
Unfortunately, after spending a long time as a major growth stock, Netflix stock has evolved and is no longer for investors that want to see exponential growth quarter-over-quarter and year-over-year.
One major reason for that is because increased competition is really beginning to meaningfully weigh on growth. Netflix has never really wanted to admit it, but it has become hard not to anymore. “Added competition may be affecting our marginal growth some,” Netflix said in its earnings statement. When circumstances change, something needs to be done.
Maybe this is Netflix’s reckoning. Maybe the lack of investors’ patience will push Reed Hastings and Ted Sarandos to think of alternative ways to drive the company through its next act.
But whatever comes ahead from management aside, investors will have to decide whether they believe in Netflix’s long-term value in the streaming wars in order to ride out the short-term volatility in the stock.