Switching off from Netflix
The video-streaming service reported a slowdown in subscriber growth, while competition from rivals is getting tougher. Matthew Partridge reports
Shares in Netflix fell almost 20% at the end of last week as investors “took fright at the unexpected slowdown in growth”, says Mark Sweney in the Guardian. The giant video-streaming firm expects to add only 2.5 million new subscribers worldwide in the first three months of the year, well down on the four million new sign-ups it reported in the same period last. Analysts had expected almost twice as many. “The company has not reported such a low number of new subscribers in the first quarter since 2010.”
There’s one obvious reason for the miss, says Robert Miller in the Times. “The big lift to subscriber additions from the pandemic is waning as people, tired of being locked down at home, seek in-person entertainment.” Evidence for this comes from the fact that the superhero film Spider-Man: No Way Home became the first pandemic-era movie to make $1bn at the office. But that’s not the whole story. Netflix also faces competition from “deep-pocketed rivals”, including Apple, Comcast and Disney, who have all launched rival products in recent years.
A premium valuation that could vanish
Indeed, Netflix admitted in its letter to shareholders that competition “may be affecting our marginal growth”, says Dan Gallagher in the Wall Street Journal. What’s more, this increased competition comes as there are signs that the industry is starting to mature, at least in North America. “Streaming has now penetrated 78% of US households, with Netflix already used by 56% of those.” This is “far from an extinctionlevel event”, but it means that Netflix’s “premium valuation” may start to disappear when markets begin “to price it for a different kind of growth”.
Still, the pessimism may be overdone, says
Lex in the Financial Times. The shares are now trading at pre-pandemic levels, even though Netflix “has become a much bigger company over the past two years” with revenues now 50% higher than they were. More importantly, it “has become a much more profitable company”. Hence its valuation is a far more reasonable 38 times forward earnings, compared to 77 just 18 months ago”. Finally, while subscriber numbers may have peaked, there is the potential for price hikes, “especially if the hits keep coming”. Plans to monetise intellectual property in other ways “are also worth keeping an eye on”.
Note that having “singled out Epic Games’ Fortnite as a rival for viewers’ attention”, Netflix is making gaming a “priority”, says Jennifer Saba on Breakingviews. The firm recently launched mobile games around franchises such as Stranger
Things. Building a gaming business from scratch won’t be easy, but it could jump-start the process by buying an existing company. If Microsoft’s plans to buy Activision Blizzard for $69bn fall through, Netflix could step in – there would be “less risk of arduous antitrust battles” with it as bidder. The firm has always shunned “splashy value-destructive” deals, but perhaps at this point “the only way to win is to play the game”.