The Netflix (NASDAQ:NFLX) share price crashed by 20% in after-hours trading on Thursday evening after publishing its fourth-quarter earnings report. The online media streamer reported slowing subscriber growth. Netflix added 8.3m net subscribers in the fourth quarter, missing its own forecast of 8.5m subscribers. This itself isn’t much cause for concern, in my opinion. I calculate that Netflix has missed its subscriber forecast 35% of the time over the past five years. It hasn’t stopped the tech giant’s share price from growing over 250% during that period.
Why is the Netflix share price sinking?
What is more concerning, in my opinion, is the outlook for the upcoming quarter. For the first quarter of 2022, Netflix now forecasts paid net subscribers of 2.5m. This is far below the 4m it achieved a year ago in Q1 of 2021. The streaming giant says that this lowered guidance reflects “a more back-end weighted content slate in Q1’22”, but I believe a similar picture was painted going into Q4 of 2021.
I reckon there are several other reasons for slower growth. First, the pandemic created a surge in demand for streaming services. Maintaining that strong momentum was always going to be a challenge, in my opinion. It also pushed competitors to launch and advance their own services. For instance, companies like Apple and Disney provided more choice to global TV viewers. While engagement appears to be healthy, acquisition growth hasn’t returned to pre-Covid levels yet. Netflix puts this down to factors including Covid effects and economic hardship in some parts of the world.
A content creating machine
So where are things going well? Netflix continues to churn out a variety of quality TV shows and movies. In 2021, six out of the 10 most searched for shows online were made by Netflix. Some of these are incredibly successful. Some big hits in 2021 included Squid Game, which generated 1.65bn hours of viewing time in its first four weeks. This made it Netflix’s biggest TV season ever.
The numbers
Let’s look at how these translated into sales and profits. Sales in Q4 grew 16% year-on-year to $7.7bn. But profit margin fell to 8% from 14% in the same period in 2020. This was attributed to a large content slate in Q4 of 2021. Stepping back, I’d note that over the years Netflix has steadily grown its business into a multi-billion-dollar giant. It’s impressive in any business to see earnings that have grown eight-fold over the past five years.
What was once a high-growth and volatile tech company is now a more mature giant with some good-quality attributes. For instance, it offers a return on capital employed of 19%. But being a larger, more mature business hasn’t prevented large swings in the Netflix share price. After an 11% share price gain in 2021, it’s now fallen by 35% so far in 2022.
Should I buy now?
So is the recent share price weakness an opportunity for me to buy? For now, I’m happy to watch from the side lines. It looks like the US technology sector is currently undergoing a correction and I reckon I should focus my efforts in other sectors for now. The drop in the Netflix share price has brought it down to a more appealing level, but I’d prefer to wait to see some stabilisation in subscriber growth over the coming months.
