Netflix Hits Subscriber Growth Wall; FVE Cut to $280

Netflix’s NFLX stock continued its tumble as the share price fell by over 25% in after-hours trading on April 19 after its first-quarter 2022 results. The firm posted its first streaming subscriber net loss ever in the quarter due in part to closing operations in Russia, but even when accounting for that loss, net adds of 0.5 million came in well short of the low end of guidance of 2.5 million. Netflix now expects to lose 2 million more subscribers in the second quarter while still maintaining its 20% margin target for the full year. Despite competition and recent price increases undoubtedly playing significant roles in the weak results and guidance, management primarily blamed other factors such as the shortages of connected televisions and password sharing.

Co-CEO Reed Hastings also made a relatively large U-turn on advertising, announcing in the earnings interview that the firm was exploring the introduction of a lower-priced ad-supported tier over the next few years. We don’t believe that these plans are likely to show up in the U.S. in the near term, as we think that the lower-priced offering will be first introduced in emerging markets such as India, where Netflix has been trounced by Amazon and Disney. We maintain our narrow moat but lower our fair value estimate to $280 from $305, due to much lower subscriber growth in 2022 and slower margin expansion.

While management outlined plans to monetize the reportedly 100 million plus non-paying households that use Netflix by charging a “sharing” fee, we don’t believe that this strategy will be the panacea that some investors have outlined over the last few years. Netflix may be able to squeeze a few more dollars out of some of the primary households, but we think that other ones will look at the new sharing fee as another pricing increase and cancel. Also, many of the households that don’t pay may not view the service as valuable enough to pay for, particularly in higher price markets like the U.S. and Western Europe.

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