Not good – a rare fall in global subscriber numbers in the three months to March saw the shares in the world’s biggest streamer, Netflix lose more than 25% of their value in afterhours trading on Wall Street Wednesday morning, Sydney time.
If that loss is sustained in regular trading on Wednesday, it will have wiped around $US40 billion from the value of Netflix shares, meaning they have lost more than $US152 billion from the start of 2022 value just over $US300 billion. They fell from $US348 at the close to $US259.75 a t8.30am Sydney time
It was the second time this year the shares have lost 20% or more in value immediately after reporting what investors saw as weak numbers – the first was after the December quarterly report in late January.
What made investors unhappy in January was the forecast for just 2.5 million new subscribers in the March quarter, but as we saw on Tuesday that didn’t happen and the company reported a rare loss – 200,000 – as the impact of the Russian invasion of Ukraine and Covid took their toll.
Netflix estimated that the combined impact of Russia’s invasion of Ukraine as well as ongoing effects of Covid cost the company about 700,000 subscribers in the period.
Netflix, like many companies, decided to suspend operations in Russia due to the invasion after having grown local-language production and a small subscriber base there.
It was the first fall for subscriber levels in more than a decade, and the pain isn’t likely to end anytime soon. Netflix also said it expects to post a loss of another 2 million in the current, April-to-June quarter.
Wall Street had forecast 2.51 million new subscribers for the March quarter for Netflix. But losing subscribers was not what even the most bearish analysts had tipped.
In its quarterly letter to shareholders, Netflix explained the fall “Our revenue growth has slowed considerably as our results and forecast below show.”
“Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration – when including the large number of households sharing accounts – combined with competition, is creating revenue growth headwinds.”
Analysts were also disappointed by the weaker than expected revenue, with a consensus among analysts calling for $US7.93 billion. Netflix reported $US7.868 billion, up less than 10% from a year ago, with earnings per share falling 6% from a year ago to $US3.53 ($US1.6 billion, from $US1.706 billion a year earlier) but that bettered expectation for $US2.90.
Investors punished Netflix’s weakened shares, sending them below $US270 after hours after they finished the regular trading at $US348.61, up 3% on the day.
After a solid day as well in normal trading shares in Disney, Warner Bros. Discovery and Paramount Global all fell between $US3 and $US5 in after-hours trading.
It could be a woeful Wednesday on Wall Street.
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There was however a bit of good news though at the end of the report – Netflix is cash rich – free cash flow rose to $US802 million vs. $US692 million the year before and the expansion into gaming was confirmed before the results were released.
The company says it expects it will be cash flow positive for the full year 2022 and beyond.
So much for all those silly stories about how Netflix’s huge content spend – between $US16 and $US17 billion this year will drain the company. It is repaying debt with the aim of cutting it to the range of $US10 to $US15 billion. At March 31 it was $US14.6 billion with cash of $US6 billion, meaning net debt of $US8.6 billion.
In fact around current share price levels Netflix could be a tasty takeover target for the likes of Meta, Alphabet or even Apple.
As well as the cash news, Netflix makes clear the company is heading into a major expansion of its gaming business with three acquisitions in recent months (one in Finland is about to settle). The company this week announced a mobile game to go with its 2023 animated series Exploding kittens (which is an existing card game).
The new game will launch directly on the mobile version of the Netflix platform and will be available to Netflix subscribers without any additional fees or in-app purchases. The game will simply be a digital version of the physical card game. It will see players drawing cards from a deck, each with their own special powers, trying to avoid the “exploding kitten” card which will cause you to lose the game.
