Netflix Bulls No More

wikimedia commons
(Image credit: wikimedia commons)

Netflix stock fell as much as 25% on Friday after the SVOD pioneer slightly missed subscriber growth targets in Q4 and issued weak guidance for the future, forcing some analysts to rethink their prior bullish stance on the stock.

Netflix shares were trading as low as $380 each on Friday morning, down 25% or $128.25 per share. The stock closed at $397.50, down 21% for the day.

Other streaming-heavy stocks fell as well. The Walt Disney Co., whose own Disney Plus service has shown some signs of slowing subscriber growth, was down 7% to $137.41, while Discovery Inc., which launched Discovery Plus last year and is in the process of merging with HBO Max parent WarnerMedia, fell 4.7% to $26.19 per share. ViacomCBS, whose Paramount Plus service was revamped last year, fell 7.4% to $31.25 each.

While the Q4 subscriber miss had a lot to do with Netflix’s decline -- it added 8.3 million new customers in the quarter, slightly below consensus estimates of 8.5 million additions -- the real damage came in its guidance for Q1. Netflix estimated that it would add about 2.5 million new customers in Q1, its lowest growth in years and particularly surprising given the first quarter’s influence on the rest of the year. Since 2017, Q1 additions have represented an average of 29% of total full year subscriber additions, according to MoffettNathanson media analyst Michael Nathanson. Using that average, Netflix could add as little as 8.5 million new subscribers in 2022. In contrast, it added 18.2 million new customers in 2021 and 36 million in 2020.

Also: Has Nielsen Been Shortchanging Netflix on Streaming Metrics? 

Adding to the concern is that Netflix had some of its most-viewed content in the past year -- Red Notice and Squid Game. If content like that wasn’t enough to drive subscriptions, what will?   

It wasn’t too long ago that a lot of analysts considered Netflix bulletproof, consistently adding subscribers and expanding its reach to the rest of the world on its way toward 300 million global subscribers by 2023. While domestic customer growth appeared to begin to level off in recent years -- Netflix has about 75 million customers in the U.S. and Canada -- international markets were expected to more than take up the slack.

But in Q4, the opposite appeared to happen. Domestic growth at 1.2 million new paying customers was nearly five times consensus estimates of 250,000 additions. Europe and the Middle East also outperformed -- 3.5 million additions versus 3.3 million consensus -- while Latin America and Asia underperformed severely. Analysts had expected Netflix to add about 1.2 million new customers in Latin America -- it added 925,000 -- and 4.1 million in Asia -- it added 2.6 million. 

That sent a signal to analysts that what was thought to be an unstoppable streaming juggernaut had an Achilles heel, and sent them to their excel spreadsheets to recalculate the future.

Barclays media analyst Kannan Venkateshwar, Morgan Stanley media analyst Ben Swinburne, Evercore ISI Group media pundit Mark Mahaney and Macquarie media analyst Tim Nollen all reduced their overall ratings and slashed their 12-month price targets on Netflix stock. Other analysts like Nathanson and Wells Fargo’s Steven Cahall maintained their overall ratings on Netflix, but slashed their price targets.

Nathanson kept his “neutral” rating on the company but cut his 12-month price target by $85 to $375 per share. Cahall maintained his “overweight” rating on the shares, slashing his price target by $200 to $600 per share and adding in a note to clients that the Q1 guidance “has investors rethinking the growth path.” 

Venkateshwar, who has been bullish on Netflix in the past, reduced his rating to “Equal Weight” and wondered if the slowdown expected in Q1 is a longer-term phenomenon. 

In his research note, Venkateshwar wrote that Netflix’s Q1 guidance “plays almost perfectly into the bear thesis” for the stock, as it will be its lowest growth target ever. And because Q1 usually is a big part of overall annual growth, the analyst speculated that the lower guidance could mean that 2022 will be significantly lower than 2021.

“Both the Q1 guide  and ’22 margins were among investor concerns going into earnings and seem to have been validated based on guidance,” Venkateshwar wrote. “Overall therefore, based on company guidance, 2022 is effectively shaping up to be the company's slowest year of growth on most KPIs.” 

Swinburne dropped his rating on the stock from “Overweight” to “Equal Weight,” and slashed his price target to $450 from $700 per share, adding that he expects content spend to continue to rise as subscriber additions slow. 

Macquarie’s Nollen dropped his rating on Netflix to “underperform” from “neutral” and slashed his price target to $395 per share, adding that he was concerned about increased competition and how that could eat into the SVOD giant’s  international growth. 

“Competition is intensifying, especially internationally,” Nollen wrote “This is becoming a bigger problem now: for example a combined Discovery/Warner this year brings strong brand recognition to many countries, with lower-priced ad-supported tiers, while other players like Paramount [Plus] and NBCU are joining forces in Europe on distribution.”

At Evercore ISI, Mahaney dropped his rating on the shares from “outperform” to “in line,” reducing his 12-month price target from $710 to $525 per share. In a research note, Mahaney said that while there are many excuses for the Q4 miss and lower Q1 guidance -- including heightened near-term churn due to an expected U.S. price increase, increased competition, market maturity, the ongoing pandemic and the late Q1 release of key content like Bridgerton -- the “negative inflection implied by the Q1 guidance is significant.”

Mahaney dropped his full year 2022 subscriber growth estimates by nearly 40% to under 17 million new customers from 26 million previously. 

While Mahaney said this could be a one-off and Netflix could recover its subscriber mojo, he noted it also could be a sign of Netflix’s maturation in key markets. And though he wrote that he has been a consistent buyer during other ebbs and flows at the company -- this isn’t the first time it has missed quarter subscriber targets -- he believes this time may be different. 

In his note, he said the reason for the downgrade was twofold -- the Q1 guidance “implies a real, surprising negative inflection point in the company’s growth outlook;” and the shift changes his growth equation for the company from one based on unit and subscriber growth to one based on price and average revenue per customer, “which makes it less attractive/sustainable.” ■

Mike Farrell

Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.