On 19 April 2022 Netflix reported that it lost 200,000 subscribers in the first quarter, its first fall in more than ten years, and its shares closed 35% lower the next day.
On 19 April 2022, after Wall Street closed, Netflix published its first-quarter results: it lost 200,000 paying subscribers, to about 221.6 million, against the 2.5 million additions it had forecast and the 4 million it gained a year earlier. It is the first loss of subscribers in more than a decade. The company attributed 700,000 cancellations to the suspension of its service in Russia after the invasion of Ukraine; without that effect, it would have added 500,000.
What the company said
In its letter to shareholders, Netflix acknowledged that its revenue growth has slowed considerably and pointed to four factors. First, the pace at which its market grows depends on things it does not control, such as the spread of connected TVs. Second, in addition to some 222 million paying households, it estimates that more than 100 million households use someone else’s account, including more than 30 million in the United States and Canada. Third, competition from other streaming services, YouTube and linear television. And fourth, the economic backdrop: weak growth, inflation and the war in Ukraine.
By region, it lost 600,000 subscribers in the United States and Canada, where it had just raised prices, 400,000 in Latin America and 300,000 in Europe, the Middle East and Africa (it would have gained 400,000 without Russia), while in Asia-Pacific it kept growing. Revenue for the quarter rose 10% and operating income was $2 billion, above forecast. Earnings per share were $3.53, against $3.75 a year earlier. The company said its main problem is weak customer acquisition in every region, and that retention was slightly below forecast, although it considers it among the best in the industry.
For the second quarter it expects to lose another 2 million subscribers, with revenue growing at around 10%, and it maintains its target of an operating margin of 19% to 20% in 2022. It also announced that it is seeking to charge for sharing accounts with other households, a feature it had tested in March in three Latin American markets, and the company said it is considering a cheaper plan with advertising.
The market reaction
The shares fell about 25% in after-hours trading on Tuesday and on Wednesday 20 April ended down about 35%, wiping more than $50 billion off the company’s market value. Year to date, the share price was down by more than 60%.
The fall dragged down other stocks in the sector: Disney, Paramount Global, Warner Bros. Discovery and Roku dropped between 5% and 9% that day, and several brokerages cut their ratings on Netflix.
What to bear in mind
Beyond this particular case, the episode shows how a change of pace at a well-known company can move its share price quickly and drag its sector with it: a single subscriber figure was enough to cut more than a third of its value in one session. For anyone with invested savings, it is worth knowing how much exposure there is to a single company or a single sector, directly or through funds that hold them in large proportions.
This note is for information only and does not recommend buying or selling any security. For your own situation, ask your adviser.
A growth figure can change in a day what the market expects of a company; knowing your own exposure is what remains in each investor’s hands.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
