Netflix Results Signal End of Pandemic Boost

The Pandemic Trade and its Potential End

Yesterday, TechCrunch analyzed the pandemic-driven surge in certain company valuations and the possibility of its reversal. To recap, the initial phase of COVID-19, coupled with lockdowns and shifts in work and travel patterns, led to rapid value increases for some businesses favored by investors.

Multiple factors contributed to the heightened appeal of specific sectors within the investment community. Essentially, companies and industries experiencing accelerated demand due to the pandemic saw corresponding improvements in their stock prices.

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However, this trend has begun to dissipate. Software companies started to relinquish their pandemic-era valuation gains in late 2021, and this decline has persisted into the current year. Companies such as Peloton, which benefited from a surge in consumer demand, are experiencing a similar downturn, albeit slightly delayed.

Netflix is the most recent example of this shift. Its recent financial results were nearly disastrous for the streaming giant. The company’s stock has fallen approximately 22% today, reducing its market capitalization to around $174 billion, down from a peak exceeding $300 billion last November.

Netflix as a Pandemic Beneficiary

Netflix was a clear beneficiary of the pandemic trade, offering affordable in-home entertainment. With widespread stay-at-home orders, the service experienced significant growth.

However, this accelerated growth phase has concluded. Netflix’s latest earnings report suggests that the company may have simply pulled forward future growth, rather than expanding its overall market. This leaves the video service facing a period of slow growth, struggling to meet elevated investor expectations.

We will now examine whether international expansion can compensate for declining domestic growth. Furthermore, we will consider the potential future for companies like Netflix that are experiencing a correction after a period of intense investor interest and consumer demand.

Netflix serves as a case study, but its current situation may foreshadow challenges for other consumer services that enjoyed substantial growth during the pandemic. Which other companies are vulnerable?

• The initial COVID-19 lockdowns spurred changes in work and travel.
• Companies with accelerated demand saw share price improvements.
• Software companies demonstrated resilience due to ongoing customer subscriptions.

Analyzing Netflix’s Performance

During the fourth quarter of 2021, Netflix experienced an increase of 8.3 million paid subscriptions, concluding the year with a total of 222 million paid memberships. While seemingly positive in isolation, this result requires careful contextualization.

The company’s initial projection was for 8.5 million subscriptions, and financial markets generally react negatively to unmet expectations. Furthermore, the 222 million subscriber count represents the slowest annual growth rate Netflix has seen since 2015.

Concerns Regarding Forecasting Accuracy

The situation isn't solely about failing to meet a specific target; it raises questions about Netflix’s ability to accurately assess its position and predict future performance. This need for reassurance may be a contributing factor to the more cautious forecast provided for Q1 2022.

Netflix anticipates gaining 2.5 million new paid subscriptions in the current quarter, a significant decrease compared to the 4 million added in Q1 2021 – despite initially forecasting 6 million for that period.

Competition and Saturation

Despite adjusting its projections, uncertainties remain regarding the underlying causes of these trends. Industry analysts have considered factors such as increased competition and potential market saturation.

Netflix has downplayed the significance of these concerns, and this assessment appears reasonable. However, the situation doesn’t necessarily indicate entirely favorable conditions for the streaming giant.

Was the Recent Slowdown Unexpected?

Looking back to April 2021, approximately three quarters of a year ago, Netflix communicated to its investors that a deceleration in growth was being observed. This followed a period where new subscriber acquisitions had been temporarily accelerated.

The company’s assessment proved partially accurate. While some growth was indeed pulled forward, the anticipated robust expansion during the latter half of 2021 failed to occur.

Currently, a key consideration is the extent of Netflix’s future options. The Exchange is investigating whether expansion in international markets can compensate for diminishing growth within the domestic market.

Should international growth prove sufficient, Netflix may yet navigate these challenges successfully. However, if it falls short, the company’s trajectory could mirror that of a popular, yet ultimately cancelled, series – nearing its conclusion.

Examining Potential Strategies

The core issue revolves around sustaining subscriber numbers. Netflix must identify avenues for continued expansion to avoid stagnation.

One potential solution lies in focusing on international markets. These regions often present untapped opportunities for subscriber acquisition.

However, relying solely on international growth carries risks. Market saturation and increased competition could hinder progress.

The Importance of Content

Content remains paramount to Netflix’s success. High-quality, original programming is crucial for attracting and retaining subscribers.

Investing in diverse content libraries can broaden appeal and cater to a wider range of tastes.

Furthermore, strategic content licensing can supplement original productions and enhance the overall viewing experience.

Domestic Market Challenges

The domestic market presents unique hurdles for Netflix. Increased competition from rival streaming services is intensifying.

Subscriber churn, the rate at which customers cancel their subscriptions, is a significant concern.

To mitigate these challenges, Netflix may need to explore innovative pricing models or bundle offerings.

Looking Ahead

The future of Netflix hinges on its ability to adapt and innovate. Successfully navigating the evolving streaming landscape will require strategic decision-making.

Whether international expansion can offset domestic slowdowns remains to be seen. The company’s response will determine its long-term viability.

The Shift in Netflix's Growth: Global vs. Domestic

A significant statistic highlighted in Netflix’s shareholder communication is that over 90% of their paid subscriber growth in 2021 originated from regions outside of the United States and Canada, collectively referred to as “UCAN.”

Analyzing the fourth quarter of 2021 specifically, the EMEA region contributed the largest share of new paid subscribers (3.54 million), closely followed by the APAC region (2.6 million). UCAN, with 1.2 million new subscriptions, surpassed only Latin America in subscriber acquisition, a region facing considerable economic challenges post-pandemic.

Beyond New Subscribers: A Holistic View

Evaluating Netflix’s global performance requires considering more than just new subscriptions. The total subscriber base and, crucially, the average revenue per membership are equally important metrics.

Currently, the U.S. and Canada represent Netflix’s most lucrative markets, generating $14.78 per subscription during the final quarter of 2021. Further revenue increases are anticipated following recently implemented price adjustments in these countries.

Conversely, Netflix reduced subscription prices in India in December 2021, even though rates were already considerably lower than in other global markets.

Long-Term Strategy and Global Expansion

Netflix leadership has publicly voiced optimism regarding India’s future potential. They acknowledge that initial expansion into markets like Brazil and Japan also presented significant hurdles.

The company’s stated objective is to maximize long-term revenue within each individual market. This suggests a strategy of utilizing lower pricing to stimulate subscriber growth, subsequently followed by price increases similar to those observed in the UCAN region.

However, this approach necessitates a long-term perspective and a degree of forbearance. The question remains whether Netflix’s shareholders will demonstrate the same level of patience.

The Significance of Public Market Trends

Due to the lack of transparency in private markets, public market performance is frequently analyzed as an indicator of broader trends. Observing companies with public disclosures can offer insights into the dynamics affecting startups more generally.

Recent downturns experienced by companies like Netflix and Peloton provide valuable lessons from several angles.

Key Observations from Recent Declines

• Specifically, the surge in startups focused on fitness experienced a period of rapid growth. These companies may now be facing a contraction as the effects of the pandemic subside, mirroring the experiences of Peloton and Netflix.
• More generally, businesses that benefited from heightened consumer demand during the pandemic may have accelerated their growth trajectory.

Consequently, these companies, such as Netflix, could now be contending with decreased demand compared to pre-pandemic levels. This serves as a cautionary signal for startups, suggesting past success doesn't guarantee future performance.

This situation presents a challenging outlook for most companies. However, it could be advantageous for new tech ventures operating in sectors negatively impacted by the pandemic, provided they have demonstrated resilience throughout an extended period of economic difficulty.

For the majority of startups and founders, this trend represents a significant warning sign that warrants careful consideration.