Investors will be worried about subscription numbers as Netflix Inc (NASDAQ:NFLX) unveils its first-quarter results after hours on Tuesday, the first of the FAANG companies to update the market this earnings season.
Previously, the film and TV streaming giant had already flagged that subscriber growth numbers were likely to slow down, but reports this week that UK households are slashing non-essential spending in the face of the cost of living squeeze, raised the prospect that TV subscription could fall more sharply than previously expected.
What’s more, Netflix subscribers were last month landed with another price rise, the second in under a year and the first increase in the cost of its UK basic service price since launch.
During the first three months of 2022, Kantar calculated that UK households pressed the cancel button on around 1.5mln video-on-demand accounts from the likes of Disney Plus, Apple TV Plus and Sky's Now TV.
Netflix said it expected to add 2.5mln new customers in the first three months of 2022, well below the 4mln net customer additions a year before and the 8.3mln in the fourth quarter of 2021.
With analysts having been forecasting around 5.9mln net 'adds', the January update sent the shares tanking, and ahead of today’s update the share price had fallen down more than 43% since the start of the year at US$337.86.
Netflix blamed the slowdown on the late release of content, such as the second series of Bridgerton and the March arrival of time-travel film The Adam Project, while also saying intensifying competition in the streaming service market could affect future growth.
Streaming services are “quickly falling down the pecking order,” said Adam Seagrave, a sales trader at Saxo Markets, amid the “battle to prioritise spending” as inflation hits a 30-year high of 7% and oil/gas prices drive up energy and petrol bills.
Analyst Sophie Lund-Yates at Hargreaves Lansdown said the squeeze on discretionary spending would undoubtedly be a challenge for all streaming providers, with Netflix “certainly having to peddle harder to keep subscriber eyeballs on its screens.
However, she said Netflix’s market share dominance and position as a hardened favourite with many households should help it combat the worst of the cancellation trend.
“The problem facing the sector is coming from households that perhaps have one too many subscriptions on the go, and are deciding to cancel the one they use the least, rather than going back to traditional TV for all their entertainment needs. I don’t think we’re likely to see a reversal in the reliance on streaming content, but it’s absolutely right to say competition just became an even bigger monster in the closet,” she said.
Seagrave agreed that problems for Netflix today “could be an indicator” for other entertainment stalwarts, such as Amazon.com Inc (NASDAQ:AMZN) and The Walt Disney Company (NYSE:DIS).
But while failing to hit the Q1 target would be highly likely send the share price plummeting further, Lund-Yates believes falling short on profit margin guidance of 19%-20% would be more likely to move the dial for investors.
Among the other things investors will be looking for is spending on content, though the fierce competition in the sector means this is to be expected if Netflix wishes to stay on top, so a big content bill would even be likely to reassure investors.
The lockdown effect is well and truly reversing at Netflix, noted Russ Mould at AJ Bell, with the shares ranking 488th in the S&P500 over the last 12 months and the fourth-worst performer in the index in 2022 to date.
“At least that means the valuation is looking slightly less stratospheric but even now consensus forecasts mean the $150bn market cap compares to 2022 sales of $33bn and net income of $5bn.
“If those estimates prove correct, that still leaves Netflix on a forward price/earnings multiple of around 30 times, which is still not the sort of rating that will forgive any further disappointments.”