When it rains it pours, I suppose.
Just about the last thing US tech shares (and equities more generally) needed at a time when all things “Growth” are under siege from rising real rates was a big miss on a key metric from a big name.
Enter Netflix. The figure (below) tells several stories simultaneously. The company’s guidance for paid net adds in the current quarter was a bitter disappointment. The Street expected 6.3 million. Netflix sees 2.5 million. That’s a big miss, to put it nicely. If realized, it would represent a decidedly poor start to the year. In fact, it would be the worst start in at least a decade.
“Our guidance reflects a more back-end weighted content slate in Q1 2022,” the company said. Netflix called retention and engagement “healthy,” but conceded the obvious: The rate of acquisitions is below the pre-pandemic pace. CFO Spencer Neumann didn’t have any definitive answers on the call. “It’s tough to pinpoint why acquisition hasn’t recovered to pre-COVID levels,” he mused.
Although the company beat estimates for paid adds in Q4 (teal shaded area in the figure, above), full-year subscriber growth was just half of 2020’s pandemic-driven surge and nowhere near 2019 or 2018 either. To get an annual figure as low as 2021’s 18.2 million, you have to go all the way back to 2016.
Of course, this isn’t all a macro story, nor is it just a Netflix story. Rather, the company is facing fierce competition, something Netflix admitted, even as it attempted to downplay the threat. “Consumers have always had many choices when it comes to their entertainment time,” the shareholder letter said. That’s a bit disingenuous. At the least, it skirts the issue. Until recently, consumers actually didn’t have that many choices. It’s certainly true that streaming alternatives have proliferated — it’s not as if families had to choose between playing the original Candy Land (Queen Frostine!) or watching Netflix. The difference between today and yesteryear, though, is that Netflix is staring down a determined Disney (whose catalogue is ocean-deep) and offerings from Apple and Amazon (whose pockets are as deep as Disney’s catalogue).
Netflix admitted that competition “has only intensified over the last 24 months,” but suggested the impact on its own marginal growth isn’t large. “We continue to grow in every country and region in which these new streaming alternatives have launched,” the company said.
Whatever the case, investors were aghast. The shares were poised to plunge in the final cash session of another lackluster week for US equities. Morgan Stanley cut the shares to equal-weight from overweight. The Street average price target is $590. The stock couldn’t even see $590 from its pre-market levels Friday. Guggenheim slashed its price target, as did Wells Fargo. Prior to the US open, Netflix was trading at just half of Wells’s former PT.
Netflix is a “general.” It’s not a FAAMG member, but it’s an alternate, if you will. If FAAMG were a sports team, and one of the starters was injured, Netflix is the sixth man. Even if the mood were bright, the broader market wouldn’t digest a double-digit decline in the shares with alacrity. And the mood isn’t bright right now.
Isn’t this just an example of nothing can grow forever? Everyone I know has had Netflix for years so I have always wondered where these new subscriptions are coming from.
Perhaps like the growth of Disney+ in India? Where the monthly fee is something like $2.50. Hardly enough to cover the $15 billion a year to develop new content.
It is starting to look like a deep content library is no longer enough. US consumers want new stuff! That’s expensive.
They’re still below 225M worldwide and 80M in the USA? Your experience might just speak to the fact that you’re urban upper middle class at least?
Obviously CAC is a thing and getting the rest of the world on the platform is going to be more difficult, though I still think that there’s a lot of cord cutting to come… (80M remaining cable subscribers in the US alone, iirc)
I think some of that lower growth might have been a consequence of COVID accelerating subscriptions for a year or year and half.
But competition is probably a factor too. Though I disagree that Disney has a super deep portfolio (at least in France, it’s really Marvel, Star Wars and the classic cartoons. It’s good stuff but you can saturate. SW classics are great, recent stuff is… between garbage (the new trilogy) and decent (baby Yoda etc). MCU is awesome (imho) but that’s a handful of films. Disney cartoons are generally great but it’s 1 a year so let’s call it 25 movies I most likely already seen before at most). It’s highly differentiated, though and the cost is perfectly acceptable for a middle class family. Amazon is definitely deeper but not really a choice as it’s included in Prime. If they introduce more tiers, that’d be a different story.
Apple has 3 shows. I like Foundation but am wondering if I ought to keep paying $5 or $6 a month just out of laziness/to see what else they bring.
FWIW, I think the real problem with Netflix is too much choice, with too much being mediocre. Tastes and differences in tastes are hard but I wish they had better tools to curate their offerings.
It’s become a joke – a comedian made the crowd laugh describing how he spent 40 minutes selecting for shows and movies rather than actually watching any of it.
I’ve had the same issue. Tik Tok is a totally different format but it really crushes that problem/makes it irrelevant and is therefore the biggest thing to happen in the last 2-3 years.
I would rather rewatch a movie I know I like- than sit through another mediocre, at best, show or movie.
I like my “library” of films I have purchased through Apple. I have Netflix but hardly ever watch it. My kids have my user name/password but I don’t think they use it either. This is a good reminder that I should cancel.
I would rather rewatch a movie I know I like
So I certainly do that – but I also feel bad about doing it. There IS great new content out there (and we are missing out by rewatching familiar stuff instead). It just doesn’t get surfaced very well.
I also believe that HBO Max’s content is far superior than Netflix, and that both Disney and HBO subscribers are more likely to maintain their subscriptions over time…then again I’m in the over 55+ demographic…
Thanks for the Candyland and Queen Frostine reference … I would add that competition in the streaming industry has now gotten very “Gloppy.”
Could be that the content is bad. How many users dropped and remain off after Cuties? Could be just another entertainment figurative immolation.