Streaming video giant Netflix, Inc. (NASDAQ: NFLX) disappointingly surprised investors in the first quarter of 2022, recording a net loss of 200,000 subscribers compared with the expectations of net additions of 2.5 million. This was the first decline in the number of subscribers in more than a decade for the company.
Consequently, Netflix CEO Reed Hastings, who never favored the ad-supported version of the service, said on the earnings conference call that the company might look for options to include lower-priced ad-supported subscription tiers phased over the next few years to remain competitive.
Following the update, shares of Netflix plummeted 25.73% in the extended trading session on Tuesday. Historically, investors have only reacted positively on two occasions following NFLX’s earnings release over the last ten quarters.
While investors have now jumped ship, this trend had been indicated by TipRanks’ Website Visits tool for some time now, as explained below. The alternative data conveyed here for our every day investors is typically something the institutional traders on Wall Street have had access to.
Results in Detail
Netflix reported Q1 earnings of $3.53 per share compared to $3.75 per share recorded in the same quarter last year. Results beat analysts’ expectations of $2.90 per share. Net income fell 5.9% to $1.6 billion.
Total revenue grew 9.8% year-over-year to $7.87 billion but missed the consensus estimate of $7.93 billion.
The company recorded $923 million in net cash from operating activities, with $802 million in free cash flow. Total net debt stood at $8.6 billion.
The decline of 200,000 net subscribers in the quarter was aggravated by the loss of 700,000 subscribers in Russia, after the company’s suspension of services there. Excluding this, 500,000 net new subscribers would have been added in the quarter.
Globally, the company experienced a loss of subscribers. Particularly, in the U.S. and Canada, Netflix recorded a net loss of 640,000 subscribers, decreasing the total number to 74.6 million. The brunt of the recent rise in subscription fees in both countries was felt.
Additionally, in Europe, the Middle East, and Africa, the company lost 300,000 subscribers, while in Latin America, a 350,000 net subscriber loss was recorded. Nevertheless, the Asia-Pacific region recorded net additions of 1.09 million subscribers, reflecting growth in markets including Japan, India, Philippines, Thailand, and Taiwan.
Global streaming paid memberships came in at 221.64 million in the quarter, up 6.7% year-over-year.
Now, Netflix expects a loss of 2 million net subscribers in the June quarter, falling shy of Wall Street’s net addition estimates of 2.4 million.
In response to the results, Netflix said in a letter to shareholders, “Our revenue growth has slowed considerably… our relatively high household penetration – when including the large number of households sharing accounts – combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently.”
According to the company, along with 222 million paying households, there are another 100 million using shared accounts, which includes 30 million in the U.S. and Canada. Also, the competitive pressure has been a major hurdle. “Over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched,” the company added.
Along with company-specific factors, management considers macro factors, including slow economic growth, high inflation, the Russia-Ukraine conflict, and disruptions caused by the resurgence of COVID-19 in some parts, are also impacting the financials of the company.
Looking forward, management noted that “Our plan is to reaccelerate our viewing and revenue growth by continuing to improve all aspects of Netflix – in particular the quality of our programming and recommendations, which is what our members value most… Our goal is to sustain double digit revenue growth, increase operating income even faster (as we expand margins) and generate growing positive free cash flow (FCF).”
For Q2 2022, management expects revenue to grow around 10% year-over-year to $8.05 billion, below the consensus estimate of $8.21 billion. EPS is likely to be $3.00, compared with analysts’ expectations of $3.01.
For 2022, the operating margin is expected in the range of 19%-20%.
TipRanks’ Website Traffic Tool, which uses data from SEMrush Holdings (SEMR), offered insight into Netflix’s performance in the first quarter.
According to the tool, the Netflix website recorded an 8.79% sequential decrease in global estimated visits in Q1 2022. Also, year-to-date website growth, compared to year-to-date website growth in the previous year, came in at a decline of 9.14%.
The predictions that were based on TipRanks’ website visits data turned out to be correct, with Netflix reporting a drop in its number of net subscribers in Q1 2022.
Wall Street’s Take
Following Q1 2022 results, Piper Sandler analyst Thomas Champion downgraded Netflix to a Hold from a Buy and reduced the price target to $293 (15.95% downside potential) from $562.
Champion moves to the sidelines as he considers management’s tone to be “subdued” on a number of factors, including competition, macro issues, adoption of connected TV, and sharing of passwords to impact the subscriber base in the coming period.
The rest of the Street is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 18 Buys, 16 Holds, and two Sells. The average Netflix price target of $492.74 implies 41.34% upside potential. Shares have lost 36.57% over the past year.
With increasing competition, macroeconomic factors, recent price performance, disappointing results, and below-expectations outlook in consideration, investors might be wary before investing in Netflix. Also, vigilance on website trends reflected on TipRanks’ Website Traffic Tool could be a guiding factor for prudent investment decisions.