Netflix (NFLX) has taken a nosedive and here’s what everybody is concerned about

Shares of Netflix Inc. (NASDAQ: NFLX) crashed and burned after a disappointing earnings report. The stock was down 35% on Wednesday after the company failed to impress the Street with its first quarter 2022 earnings results a day earlier. Amid the loss of subscribers and the mulling of new strategies, there is a lot of chatter about Netflix’s future trajectory and growth prospects.

Mixed results and revenue slowdown

Netflix’s revenue for the first quarter increased 9.8% year-over-year to $7.8 billion but fell short of analysts’ projections. Although earnings decreased 5% to $3.53, it surpassed estimates. Netflix’s slowing revenue growth has been a growing concern with the current quarter providing no respite. After a 24% growth in Q1 2021, revenues were up just 9.8% in Q1 2022.

For the second quarter of 2022, Netflix expects revenue to grow 9.7% YoY to $8 billion. The company believes its high household penetration along with the increased competition from other streaming services are the main headwinds to growing revenue.

There are over 100 million households that are sharing accounts which is another factor that limits revenue growth. Apart from this, factors like slow economic growth, rising inflation and the Ukraine-Russia war are also impacting revenue growth. Netflix plans to reaccelerate its revenue growth by improving the quality of its content and through international expansion.

Subscriber exodus

The biggest concern is the growth (or lack of it) in subscribers. Netflix had guided for an increase of 2.5 million subscribers during the first quarter but instead it lost 200,000 subscribers, its first decline in over a decade. In addition, the company has projected that it will lose another 2 million subscribers in the second quarter of 2022.

One of the reasons for the loss was the suspension of its service in Russia and the wind-down of all Russian paid memberships, which resulted in the loss of 700,000 users. Excluding this impact, paid net additions totaled 500,000.

Netflix lost subscribers in the US & Canada, Latin America and EMEA regions due to a slowdown in business in Central and Eastern Europe as a result of the Ukraine-Russia war, macroeconomic weakness and price changes. Asia-Pacific recorded paid net additions of 1.09 million helped by growth in markets like Japan, India, Philippines, Thailand and Taiwan.

In Q1 2022, global streaming paid memberships grew 6.7% to 221.64 million and for the second quarter, the company forecasts this number to grow 5% to 219.64 million.

Strategy change

One of the highlights of the earnings report was the change in Netflix’s stance over two issues – password-sharing and advertising. The company estimates that out of its 222 million paying households, there are over 100 million households that share accounts. This includes 30 million in the US & Canada region.

Netflix is now focusing on finding the best way to monetize these households. As part of these efforts, it rolled out two new paid sharing features in three markets in Latin America wherein members would have to pay slightly more to share the service with people outside their homes.

The company is also considering an ad-supported model. On its quarterly conference call, Co-CEO Reed Hastings stated that one way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. He added that the company was open to offering even lower prices with advertising as a consumer choice.

This change in strategy has raised eyebrows and while some are optimistic about the possibility of additional revenue, others have found it worrying that the company has come to the point of having to change a long-standing position.

To sum it up, while these developments have left many folks on the Street rattled, there are a few who remain optimistic that these challenges are temporary and that Netflix will be able to weather this storm in due course.

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