background image

Netflix subscriber growth grinds to a halt – what happens next?

Equities 7 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  Netflix shares were down 9% in extended trading last night despite strong earnings growth and strong free cash flow generation. Investors were shocked that Netflix only projects 1mn net change in paying subscribers in Q2 which translates into an annualised growth rate of just 2%. The company tried to project a positive outlook for the second half driven by new content rollout, but the unease was apparent on the conference call. We take a look at Netflix and what could be next for the this entertainment giant.


It did not take long to get the first real earnings shock. Last night Netflix reported Q1 revenue that was in line with expectations at $7.16bn up 24% y/y and EPS beating estimates at $3.75 up 140% y/y. So why were investors not pleased sending shares down 9% in extended trading to levels just above $500 and right back into the congestion area observed over the past year?

21_PG_2
Source: Saxo Group

Shocking Q2 subscriber outlook

Netflix reported Q1 net change in paying subscribers of 4mn vs est. 6.3mn and then reported shockingly only a 1mn net change in Q1 vs est. of 4.4mn. Out of 207.6mn paying subscribers that is essentially growth coming to a halt with q/q change annualized of 1.9% growth. This is the worst growth number for Netflix ever and highlights that the tailwind from Covid-19 lockdowns is coming to an end, but the content rollout has also been light recently as production has been interrupted by Covid-19. The company also announced shares buyback worth $5bn which is also an indication that the company is less aggressive on growth and finding it difficult to invest in growth. Comments on the conference call such as “subscriber trajectory is a little wobbly right now” did not help either on sentiment. According to Netflix, they do not believe increasing competition is the cause of the growth slowdown.

21_PG_3

Should Netflix branch into gaming?

At the end of the conference call management said gaming is a real threat to attracting attention for video streaming of TV-series and movies. Netflix said that it will be an important form of entertainment going forward. Here is maybe the clue for Netflix’s future growth. If the company defines itself as more than a video streaming platform for TV-series and movies, then video streaming of e-sport is an obvious expansion of the business. Or even more bold, expand into gaming itself but here Netflix could quickly head into competition with other big technology platforms including Apple and Microsoft.

What is the free cash flow equilibrium?

If we assume that Netflix missed gaming completely like Microsoft initially missed the Internet and search engine technology, then Netflix will eventually be this big player in video streaming of TV-series and movies but with much slower growth rates and not being this growth story any longer. What happens then to the valuation and the stock price?

The key question is what Netflix’s long-term free cash flow generation profile looks like. The 12-month trailing free cash flow has gone from $-3.14bn in Q4 2019 to $2.46bn in Q1 2021 as content production has slowed down, but Netflix said that it expects to be at break-even for all of 2021 as content production ramps up again. Again, the question is, what is the necessary level of recurring content production to preserve the subscriber base? Nobody knows this yet, but it will turn out to be the defining moment for investors. Maybe we will know in a not-so-distant future.

21_PG_4

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.