Netflix Will Need More Than Price Increases to Win Over Investors

(Bloomberg Opinion) -- Netflix Inc. delivered a slew of hits in the fourth quarter, with “Red Notice” and “Don’t Look Up” among its top three most-watched movies ever. But quarterly results underscored why programming success no longer automatically translates to a level of subscriber growth once common for the streaming giant.

Netflix added 8.3 million net new users globally, falling shy of the company’s projection of 8.5 million. But the bigger disappointment was Netflix’s projection that it will add a paltry 2.5 million subscriptions this quarter. Analysts had expected the company to sign up well over six million new subscribers in the current period, according to data compiled by Bloomberg. Netflix shares slid 20% in after-hours trading.

The weak outlook, which the company attributed to a “Covid overhang” and economic hardship in places like Latin America, sent jitters through the streaming world. Shares of streaming companies including Walt Disney Co. and Roku Inc. dropped in after-hours trading as investors anticipated the slowdown in subscriber growth would be widespread.

The slowdown raises concerns over whether the market is becoming increasingly saturated, with a shrinking available pool of subscribers. At the same time, Netflix admitted competition from other streaming companies may be affecting its growth.

One surprise for Netflix was its strong performance in its home market. In the U.S. and Canada, the company added 1.2 million subscribers, around double what analysts were anticipating, bringing its total paid membership count to 75.2 million in the region.

That growth allowed Netflix to boost prices in the U.S. last week by between $1 and $2 a month, making it one of the most expensive services in an increasingly crowded market. The decision was greeted warmly by investors because it signaled increasing pricing power in the U.S.  

But it was a brief reprieve for shareholders, who have seen Netflix’s once high-flying stock drop 16% since the start of the year as of today’s close amid growing concern about the high costs of incessant content creation needed in the streaming business.

Some investors are wondering whether the streaming business will ever be highly profitable.

“As an investor, I want to understand when will I get mine? How does Netflix answer this question to investors?” Mark Stoeckle, chief executive officer and senior portfolio manager at Adams Funds, said ahead of the earnings announcement.

The company’s free cash flow for 2021 ended up at negative $159 million, and Netflix reiterated on Thursday it expects to be free-cash-flow positive this year and beyond. Netflix said fourth-quarter revenue was $7.71 billion, in line with analyst estimates.

Because Netflix’s growth in North America isn’t what it once was, it now needs to extract more value from customers by boosting a metric known as ARPU, or average revenue per user. From 2018-2020, North America revenue growth was balanced between bringing in new subscribers and charging them more, but in 2021 prices started driving much of the revenue growth, said Justin Patterson, equity research analyst at KeyBanc Capital Markets. 

Netflix reported average revenue per member in the fourth quarter of $14.78 in the U.S. and Canada, compared with $8.14 in Latin America and $9.26 in the Asia-Pacific region. 

Netflix’s comfort with its pricing power stands in contrast to its rivals. Days after last week’s price increase, WarnerMedia’s HBO Max offered potential subscribers 20% off its monthly plans, perhaps in an effort to lure some Netflix customers.

But price increases aren’t enough to keep investors content, and Netflix can only go so high before customers start to question the service’s value.

With U.S. and Canada subscriber growth performing relatively well, the focus turns to global growth, where Netflix is seeing signs of weakness.

Netflix is pouring billions of dollars into local language content around the world. The Asia-Pacific region is thought to represent Netflix’s greatest opportunity for growth, and the company has spent more than $1 billion on programming in Korean, including on last year’s smash hit “Squid Game.”  

In India, Netflix recently slashed prices by as much as 60% as it seeks to claw back market share from Amazon.com Inc. and Disney, the two dominant streaming services in the country.

Streaming companies are expected to spend more than $230 billion on content in 2022, according to a report from Ampere Analysis. Shareholders are clearly struggling with those eye-popping figures — most of the companies have underperformed the S&P 500 Index over the past 12 months.

Netflix’s disappointing outlook won’t do anything to allay those fears.

More From Bloomberg Opinion:

• Netflix Is Winning Streaming’s Own ‘Squid Game’: Tara Lachapelle

• Netflix Should Reconsider Its Aversion to Live Sports: David Wainer

• Netflix Proves It's Essential, Pandemic or Not: Tara Lachapelle

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Wainer is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications. He has covered markets, health care, economics and international affairs for Bloomberg News.

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