The Netflix share price has plunged by almost 9% in afterhours trading after the television and film streaming technology company reported a significant slowdown in new subscriber growth over the last quarter. The company itself has been warning investors for some time it expected a slowdown to follow the particularly strong growth last year after the coronavirus hit.
The presumption was that new subscribers had signed up earlier than they would have under normal conditions, front-loading growth and leaving the reservoir of potential new subscribers somewhat depleted. That growth has now slowed was predictable. In fact, Netflix itself made the prediction.
But the stock market is, of course, an emotional beast. Netflix’s accelerated growth over the past year was probably over-rewarded by share price gains of almost 70% between the bottom of last year’s spring market sell-off and the recent highs of January this year. And the slowdown has now been arguably harshly punished by today’s decline in the company’s valuation.
But Netflix itself was caught by surprise by the extent of the drop-off over the first three months of 2021. With high subscriber growth largely maintained throughout 2020, perhaps the company had reached the conclusion its own warnings had been overly pessimistic. But yesterday’s reported new subscriber number to the end of March fell 50% short of the company’s own forward guidance at less than four million, when 6 million had been predicted.
It appears worse is to come with Netflix forecasting just a million new subscribers over the current quarter. The sharp drop back down to Earth may come to be seen as one of the first major indications the fortunes of ‘Covid stocks’ are now reversing. The term has been assigned to companies whose businesses have benefitted from lockdown restrictions, many of which earn their revenues from the sale of digital products.
Revenues were, however, up 24% on the same three months a year earlier, coming in at $7.16 billion. That saw net income for the period rise to $1.71 billion from $720 million a year ago. The company’s statement read:
“We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays.”
Having first launched back in 1997 as a rental DVDs-by-post service, Netflix is today one of the world’s largest internet companies with a valuation of around $240 billion and is the market leader in television and film streaming. However, competition has been heating up in recent years with Disney, Apple and American telecoms conglomerate Comcast all launching their own subscription streaming services. The company is confident that the long-term trends remain in its favour, commenting:
“In the short-term there is some uncertainty from Covid-19; in the long-term, the rise of streaming to replace linear TV around the world is the clear trend in entertainment.”
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