Netflix Q1 forecast erases much of stock’s pandemic gains

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Netflix Inc has shattered hopes of a quick recovery after forecasting weak first-quarter subscriber growth on Thursday, sending shares down nearly 20% and wiping out most of the remaining profits caused by the pandemic since 2020.

The world’s largest streaming service predicted it would add 2.5 million customers between January and March, less than half of the 5.9 million predicted by analysts, according to data from Refinitiv IBES.

Netflix toned down its growth expectations, citing the late release of expected content such as the second season of Bridgerton and Ryan Reynolds’ time-travel film Project Adam.

Shares of Netflix fell almost 20% to $408.13 after hours. Shares of rival Walt Disney Co (DIS.N), which has bet on building a strong streaming business, fell 4%. Streaming device Roku Inc (ROKU.O) fell 5%.

Nasdaq futures fell almost 1%, indicating that traders expect the tech index to open lower on Friday.

Netflix added 8.3 million customers from October to December when it rolled out an extensive lineup of new programming, including the stellar films Red Notice and Don’t Look Up, as well as a new season of The Witcher. Industry analysts had forecast 8.4 million.

The total number of company subscribers worldwide at the end of 2021 reached 221.8 million people.

In a letter to shareholders, Netflix said it believes the ongoing COVID-19 pandemic and economic hardship in parts of the world such as Latin America may have prevented subscriber growth from returning to pre-pandemic levels.

COVID “created a lot of issues” that made it difficult to forecast subscriber numbers, “but the fundamentals of the business are pretty solid,” co-CEO Ted Sarandos said in a video interview after the earnings call.

The company posted adjusted earnings per share of $1.33, beating analysts’ consensus estimate of 82 cents. Revenue reached $7.71 billion, in line with estimates.

Netflix said the competition “may affect our marginal growth somewhat” but added that it is still growing in every country where new streaming options have been launched.

“Even in a world of uncertainty and increasing competition, we are optimistic about our long-term growth prospects as streaming replaces linear entertainment around the world,” Netflix said in a shareholder letter.

Competitors including Disney and AT&T Inc. (TN) HBO Max are pouring billions into new programming to capture market share in the streaming industry.

But acknowledging, even somewhat subtly, that competition is affecting Netflix’s subscriber additions is a uniquely bold declaration for the company, said Michael Nathanson, a media analyst at MoffettNathanson told CNBC.

"It’s a signal the streaming giant is finally feeling some competitive affects of other services such as Disney+, WarnerMedia’s HBO Max, ViacomCBS’s Paramount+ and NBCUniversal’s Peacock," he said.

Last week, Netflix hiked prices in its largest market, the US and Canada, where growth has stagnated, analysts say, and is now looking to boost overseas.

Netflix subscriber growth was expected to stabilize in 2022 and return to pre-pandemic rates, when subscribers increased by 27.9 million in 2019, analysts say.

In their video interview, the executives sought to reassure investors that Netflix’s long-term outlook is bright. Sarandos said the service has not seen a decline in engagement or customer retention, and he predicts the shift to streaming from traditional TV will continue to open up opportunities worldwide. Shares fell almost 20%.

“At times it can be a little tricky to determine the speed of migration when there are some very global events or even local conditions,” Sarandos said. “But this is definitely happening. There is no doubt about that.”

The company is looking for new ways to engage customers, including through mobile video games. Netflix said it released 10 games in 2021, was pleased with the early reception, and will expand its gaming portfolio in 2022. The company’s upcoming plan includes new installments of Ozark and Stranger Things, as well as a three-part documentary about Kanye West.

With inputs from Reuters