Netflix tanks as subscriber growth cools

Streamer shares fell as much as 11% following the earnings announcement

Netflix's subscriber growth is showing signs of a slowdown as the streaming giant reported 4 million new subscribers in the first quarter of 2021, after projecting in January that it would pull in 6 million new customers.

The stock is set to open sharply lower Wednesday. 

That 2 million subscriber miss, helped send the stock down as much as 11% in after-hours trading.  The company attributed the slowdown to a lighter content slate in the first half of the year due to production delays related to COVID-19. Netflix's global subscriber count now sits at 208 million. 

But the age of "peak" streaming may have arrived and may be having an impact on the longtime streaming leader. The recent 15th annual Deloitte media trends report surveyed 2,009 U.S. consumers in February on their entertainment preferences. The data revealed that the average subscriber has four paid video streaming services – that is down from five in October. While 82% are paying for video streaming, with the pandemic easing and warm weather approaching, people may be more selective – and cost-conscious – related to their streaming spending. 

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The good news for Netflix was that its revenue grew 24% year-over-year to $7.16 billion, in line with its quarterly forecast. The company reported a profit of $1.7 billion, or $3.75 per share, compared to $542 million in the previous quarter. 

Netflix noted that, while the rollout of vaccines is very uneven globally, the company has restarted production in every major market except for Brazil and India. 

The company expects paid membership growth will re-accelerate in the second half of 2021 as the streaming service unveils a slate of popular programming, including returning hits including "Sex Education," "The Watcher," and "La Casa de Papel." It is also counting on original films like "Red Notice," starring Gal Gadot, Dwayne Johnson and Ryan Reynolds, and "Don’t Look Up," starring Leonardo DiCaprio, Jennifer Lawrence, Cate Blanchett, Timothée Chalamet, and Meryl Streep. 

Netflix estimates its spending on content will reach over $17 billion this year. 

"In the short-term, there is some uncertainty from Covid-19," Netflix wrote in its quarterly shareholder letter on Tuesday. "In the long-term, the rise of streaming to replace linear TV around the world is the clear trend in entertainment."

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Netflix's cooled growth comes as competition in the streaming space continues to grow. 

One of Netflix's biggest competitors, Disney+, has shown impressive growth since its launch in November 2019. Disney said last month that the company topped 100 million global subscribers in just 16 months. 

Netflix co-founder Marc Randolph told FOX Business' Stuart Varney in an interview last month that he was "really impressed with what Disney has done so far." However, he argued that Netflix has no reason to be scared of Disney's success. 

"Every single major media company is in a streaming business, and right now we're all sampling. But I promise you, there is going to be a musical chairs moment and there is not going to be chairs for everybody," Randolph said. "And I think what consumers are going to do is have their Marie Kondo moment where they really ask themselves, is this service bringing me joy? And if it's not, they're going to dump it. And I certainly think that.. Netflix and Disney are both going to be left standing. And I wonder who else will be joining them." 

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A likely competitor who will be joining Netflix and Disney at the top is Amazon, which revealed in an annual report last month that the company now has more than 200 million Prime members worldwide. While Prime members have access to the company's streaming service, Prime Video, it's unclear exactly how many subscribers are using it. Amazon said it spent $11 billion on its video and music content, an increase of 41% from $7.8 billion in 2019. 

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Netflix's shareholder letter reiterated Randolph's message, arguing the company still has plenty of room to grow.

"When comparing services, subscriber figures alone tell only part of the story (given bundles, discounts, and other promotions)," Netflix said. "So it’s important to also focus on engagement and revenue as key indicators of success." 

According to the company, engagement per member household in the first quarter grew solidly compared to a year ago with the company's "churn" – the percentage of accounts that cancel or choose not to renew their subscriptions – below levels from the same period a year ago.  

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Looking ahead, the company is forecasting paid net additions of 1 million in the second quarter, the lowest estimate in its history so far, citing "roughly flattish" membership growth in the United States and Canada and Latin America. 

Netflix says it is on track for free cash flow in the full year to be approximately break-even. The company generated $777 million in cash during the first quarter compared to $260 million a year ago. The company reiterated that it is very close to being sustainably free cash flow positive and that it no longer has a need to raise external financing to fund its day-to-day operations. 

Ticker Security Last Change Change %
NFLX NETFLIX, INC. 499.55 +3.47 +0.70%

During the quarter, the company reduced its total gross debt balance to $15.7 billion as of the end of March. The company intends to maintain a gross debt level range of $10-$15 billion, and its board has approved a $5 billion stock buyback program which will begin in the second quarter.

Netflix's full-year operating margin target of 20% remains unchanged.