November 2021 was a peak for many fast-growing tech darlings. Netflix is one of the most punished.
I think stocks are falling and after two mind-blowing innovations, Netflix’s best days are in the rearview mirror. Here are three reasons:
- The online streaming market is growing rapidly but has attracted successful rivals
- Netflix’s revenue growth rate is slowing
- Netflix is not adding enough new users
It’s time for the company’s management team to step down and appoint a CEO who can invent a new growth engine for the online streamer.
The online streaming market is becoming more competitive
While growing rapidly over the past five years ending in 2020, the online streaming industry is expected to slow slightly over the next five years. According to IBISWorld, industry revenue grew at an annualized rate of 24.8% to $41.8 billion between 2015 and 2020 – and is expected to continue growing at an annualized rate of 23.2% over the five years to 2025.
Competition has increased along with revenue growth, reducing Netflix’s share. While Netflix led the industry with 27.6% of the market in 2020, its share has eroded significantly since 2016, when it controlled 31.5% of the online streaming market, according to IBISWorld.
Rivals took a bite out of Netflix. For example, YouTube’s share went from 20.6% to 21.8% over those five years; Disney went from 12.2% to 18.6%; and that of Amazon
Netflix revenue growth is slowing
With rivals growing rapidly and Netflix’s market share declining, it’s no surprise that Netflix’s revenue growth is also slowing. According to TipRanks, in the fourth quarter of 2020, Netflix’s revenue grew by 21.5%, much faster than the 16% growth recorded in the fourth quarter of 2021.
Netflix guided investors to expect further deceleration for the first quarter of 2022. Specifically, Netflix said its revenue would grow a relatively low 10.3% to $7.9 billion. in the quarter ending March 2022, TipRanks noted.
Netflix Subscription Additions Forecast
Investors will be watching net subscriber additions for the first quarter closely – which Netflix projected at 2.5 million worldwide. Like Barrons reported, that forecast was well below Street’s consensus forecast of 5.7 million – which it now sees at 2.8 million.
Even if Netflix beats Wall Street’s forecast for the first quarter, investors will surely punish the stock if it issues a disappointing forecast for the quarter ending in June. Bank of America
Additionally, so-called data checks suggest a slowdown in Netflix app downloads and an increase in cancellations as price increases take effect. Schindler noted that downloads were flat from the first quarter of 2021 and down 6% from the fourth quarter of 2021, according to SearchAlpha.
And after Netflix raised subscription prices in the US and Canada, cancellation traffic rose 0.5% in the first quarter.
With inflation at 8.5% in March, it wouldn’t surprise me if cancellation traffic increased as people look to save money on non-essentials – perhaps by canceling Netflix after watching a popular series – like Bridgerton – and re-enroll in the future when, say, the final season of The crown becomes available.
In short, unless Netflix beats expectations for Q1 subscription net additions and raises its guidance for the current quarter, Netflix shares could dive tomorrow.
Perhaps the only hope for the bulls is that expectations are now so low that Netflix can exceed them. I doubt it because analysts perform data checks that reduce the uncertainty of what might be reported.
Time for new direction
With Netflix’s future looking increasingly bleak, is there a reason investors are hoping its revenue growth will pick up speed?
Despite the extraordinary success of co-CEO Reed Hastings, I see no reason to believe that his growth rate will return to where it was.
To be fair, there’s no doubt that what Hastings has accomplished during his tenure as CEO has been outstanding. The creation of two revolutions in video entertainment – DVD by mail and online streaming – have enriched investors and truly changed the entertainment industry.
Unfortunately for Netflix investors, competition has woken up and reduced Netflix’s market share and growth, which is well below IBISWorld’s industry growth forecast.
The price increases will certainly help improve Netflix’s cash flow. But I think investors don’t buy tech stocks for that – they want sustained growth above 25%. To achieve such growth, Netflix needs another big idea along the lines of the ones I mentioned above.
In January, Hastings told investors the company was trying to figure out what was causing slower net subscriber growth. According to the earnings call transcript, the answer could be COVID, more competition, or something else. Meanwhile, he said, “Netflix’s execution is stable and improving. So for now, we’re staying calm and trying to figure it out. [what’s causing the slowdown].”
To restore Netflix’s rapid growth, better execution of its existing strategy is not the answer. A new strategy is needed.
One of Hastings’ accomplishments has been Netflix’s culture that likens the company to a top-notch sports team. If a strong player loses his edge, Hastings makes it clear that it’s time to put in place someone who can handle the challenges demanded of that position now and in the future.
Unfortunately, I think it’s time to apply this rule to Netflix co-CEOs Hastings and Ted Sarandos. However, that doesn’t make sense until the right person is ready to step in as CEO and invent a new growth path for Netflix.