The House The House

Netflix reported its fourth-quarter earnings yesterday. Its stock price tumbled dramatically following a warning about projected growth.

What happened? Netflix reported that it added 8.28 million net new subscribers in Q4 2021, falling slightly short of its forecast of 8.5 million. More importantly, the company projected that it would add only another 2.5 million in Q1 this year — well below analysts’ expectations, and less than the 3.98 million it picked up in Q1 2021.

Why are these numbers so important? Investors look ahead to future performance, and this weak projection has worried them. Netflix’s stock price fell over 20% in after-hours trading, wiping nearly $45 billion from its market capitalization.

Why the weak forecast? The company cited several reasons. One is a shortage of big new releases, especially in the first half of the quarter. A “Covid overhang” — a slowdown correcting a boost in subscribers during the pandemic — was also mentioned. Crucially, Netflix also said that growing rivalry from streamers “may be affecting our marginal growth.”

Isn’t that obvious? Of course new platforms like Disney+, HBO Max, and Paramount+ compete with Netflix. But the company has never admitted so clearly that these competitors are inhibiting its own growth. Its argument tends to be that there’s enough space in the market for itself and competitors. The weak forecast has raised doubts about that.

So other streamers should rejoice? Not so fast: Netflix’s big slide affected them, too. Disney shares are down nearly 6% this morning, Roku around 6%, and Viacom 5%. Anxiety spread as some investors worried about how much more the streaming market as a whole can grow. “They’re saying the streaming wars are over,” Rich Greenfield told CNBC’s Fast Money. In fact, this entire segment with Greenfield is worth a watch to understand the situation from the investing POV.

Where do the streaming wars stand? Netflix is still leading by some way, with 221.8 million subscribers at the end of 2021. Amazon’s Prime Video had around 175 million active streaming users by Q1 last year, although it is not exclusively a streaming service. Disney+ had 118.1 million subs as of October 2021, and is targeting 230–260 million by September 2024.

What can Netflix do about its weak projection? Other than subscriber growth, the main way for it to increase revenue is by raising its prices, which is exactly what it did last week in the U.S. and Canada. Its standard plan in the U.S. is now $15.49 — more than HBO Max. But the North American market is more saturated than elsewhere. Netflix continues to ramp up spending on content, which suggests that it thinks it can still grow a lot globally.

Image at top: “The House,” a Netflix Original released in Q1 2022

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