Netflix’s Drama: A Post-Pandemic Fall from Grace

Netflix Inc. shares have plunged after forecasts for new customers disappoints investors. Shares in Netflix fell as much as 20% to 404.50 USD after trading hours on Friday 21st of January 2022, erasing about 45 billion USD in market value as investors subscribed to the prospect that the streaming company is entering a new face of slower growth. 

This comes after the firm’s 2022 forecast predicts that the company is expected to add 2.5 million subscribers this quarter, a far lower amount than the 6.26 million Wall Street’s projection for the current period, according to Bloomberg’s reporter Lucas Shaw. In 2021, Netflix added 18.2 million customers in total, about 50% lower than the record in 2020 amount of 37 million acquired during the COVID-19 pandemic. Hence, the lifting of social restrictions across the globe has hindered Netflix’s growth. According to Laura Hoy, an equity analyst at Hargreaves Lansdown, Netflix’s management blamed a back-loaded content schedule that will see several big releases come out at the end of the quarter. They stated that this contributed to the fall of share prices in addition to the slower growth forecast.

The slowdown in subscription growth and predicted subscription growth raises concerns about whether the streaming industry is becoming increasingly saturated. However, Netflix attributed its losses in growth to its fall in dominance in the streaming market from rival companies like Amazon Prime Video, Disney Plus and Warner Media’s HBO rather than a general decline in its market. Furthermore, KeyBanc Capital Markets analysts lowered their rating on the stock from overweight to sector weight following the earnings release on 20th January. They wrote in a note that one of the reasons they are less confident in the outlook is that, despite an improved content slate, the company still experienced challenges to its gross additional subscribers. On the other hand, Piper Sandler analysts, who maintained an overweight rating on the stock while cutting its target price from 705 to 562 USD, wrote in a note on 20th January that it still “remains early days” for subscriber growth opportunity overall.

The firm also increased the price of its U.S. standard plan by 1.50 USD to 15.49 USD, and the basic plan by 1.00 to 9.99 USD monthly. The premium plan saw the biggest increase of 2.00 to 19.99 USD monthly. In Canada too, the price for the standard plan increased by 1.50 to 16.49 CAD, while the premium plan swelled from 2.00 to 20.99 CAD. This is a gamble considering the lower pricing from competitors. For example, HBO Max, owned by AT&T Inc (T.N), is currently offering an 11.99 USD per month promotion for 12 months. Similarly, the price of Walt Disney Co’s, Disney+ is 7.99 USD per month or 79.99 USD per year. By increasing prices in those two markets, Netflix management can derive more growth from increasing prices than new customers given the fact that they both are Netflix’s most popular regions with 74 million streaming customers as of September 2021. This area accounted for nearly 44% of the company’s revenue in Q3 2021. However, according to Mark Zgutowicz, a senior analyst with Rosenblatt Securities, rising prices could stultify the growth of Netflix in the USA and Canada. From 2018 to 2020, Netflix balanced its strategy for revenue growth in North America between bringing in new subscribers and charging them more. In a statement to CNN, the streaming service revealed its hope that price increases would help them offer new offer a wider variety of quality entertainment options. However, the appreciation of the dollar could also prove detrimental to Netflix in international markets. Management estimates the dollar’s appreciation will reduce 2022 sales by about 1 billion USD. 

With that said, 90% of Netflix’s growth is expected to come from outside these home markets. In recent years, Netflix has been pouring billions of dollars into local language content around the world. Specifically, the Asia-Pacific region is thought to represent Netflix’s greatest opportunity for growth, and the company has spent more than 1 billion USD on programming in Korea, including on last year’s smash hit “Squid Game.” In India, Netflix recently slashed prices by as much as 60% as it seeks to claw back market share from Inc. and Disney, the two dominant streaming services in the country. 

Additionally, Netflix still seeks to find other means which could be potential sources of growth. While Netflix has relied on movies and TV shows to draw customers during its 25-year history, Chief Product Officer Greg Peters has identified another potential source of growth: gaming. The company introduced games to its service in the second half of 2021 and plans to expand its offering over many years. It will both develop games in-house, and license popular titles from existing studios.

Despite a rough end of year subscription growth, the company’s revenue increased by 16% for October, November, and December 2021, compared to the same period a year earlier, hitting 7.7 billion USD. Furthermore, quarterly profits increased by 12% in 2021. For the year, profits jumped from 2.7 billion USD to 5.1 billion USD, while revenue grew by 19% to 26.7 billion USD. Therefore, perhaps the company’s recent financial growth gives investors hope that their holdings in Netflix will perform well in 2022 despite slow subscriber growth forecasting and price increases. Investors, however, must consider whether Netflix’s pricing strategy will gain or lose customers overall.

By Jenny Enow-Akpa

Sector Head: Robert Armstrong-Jones