In the current market environment, where days of deep red greet investors, it’s not surprising to see that earnings season has already claimed some high-profile victims.
That’s because, with the Federal Reserve set to start hiking interest rates, markets are looking for any potential reason to sell off stocks. That’s been particularly true of growth stocks.
Last week, one growth tech company which gave markets ammunition was streaming giant Netflix Inc (NASDAQ: NFLX).
Netflix shares tumbled as much as 25% on Friday after the streaming company reported its fourth-quarter and full-year 2021 earnings after the close on Thursday. So far in 2022, shares are down nearly 40%.
But were the numbers really that bad that it warranted Netflix’s worst one-day decline in nearly a decade? Here’s what investors should know.
Subscriber numbers still growing
In the fourth quarter of 2021, Netflix actually saw new sign-ups of 8.3 million – beating Wall Street expectations.
However, it was the dreaded shortfall on “guidance” that spooked investors. Netflix said it predicted it would add only 2.5 million subscribers this quarter, falling far short of analyst estimates.
The slowdown, to some extent, could be expected given a monster year in 2020 when Netflix added 37 million subscribers globally.
For the whole of 2021, the new subscribers number was just under half that figure at 18 million. Unfortunately, right now Netflix’s business is reliant on where management see net adds on the subscriber front.
Yet, as history shows, predicting net adds is incredibly difficult. And Netflix’s management has done a commendable job of guiding the market on this front (see below).
Source: Netflix Q4 2021 shareholder newsletter
But slowing growth?
What has really spooked investors, and the market at large, was the slowing growth going in 2022. Yet the truth of the matter is that, in a post-pandemic world, understanding where the “streaming wars” are headed is going to be hard.
What can be said is that there are legitimate concerns over the amount that is now required to be spent on content creation to stay competitive.
When Netflix had the streaming world to itself, the pressure wasn’t as intense to pay up for content. Now, the likes of Disney+, HBO Max, and others have entered the fray and they are spending big on content.
Content is king…and expensive
To illustrate how much content “inflation” costs, just look at the rise in spending from Netflix itself. In 2016, it spent a still-sizeable sum of US$5 billion on content.
Fast forward to today, though, and Netflix’s content spend is expected to hit US$19 billion this year – up 13% from 2021.
However, many investors have doubted Netflix in the past and its business has thrived, along with its shares – which are up nearly 6,000% over the past decade.
Yet for Netflix shareholders and potential investors, the competitive landscape, content spending plans and post-pandemic economy are certainly factors to monitor in the year ahead.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
