Netflix (Nasdaq: NFLX) shares were crushed following the company's Q1 earnings report which showed a drop in subscribers for the first time in a decade. For years, many people have speculated that the streaming business was going to fundamentally change as it became the dominant revenue stream for studios and entertainment companies after being a bonus revenue stream for a few years due to the bulk of their revenue coming from the box office and DVD sales.
Ultimately, Netflix was able to grow its business and become a competitor to these studios and was able to capitalize on the cheap cost of content. Now, the cost of content is rising as studios are holding onto it to build their own streaming services. There's a war for talent, and Netflix is forced to compete to develop its own IP to keep its subscriber base from fraying.
In its conference call, Netflix attributed the miss to various factors like inflation, increased competition, password sharing, and Russia's invasion of Ukraine. However, a bigger factor is that the company saw a surge in growth during the pandemic which continued into 2021 due to stimulus payments and the virus continues to hamper a return to normal. Now, there is a return to normal and pent-up demand for services. At the same time, new streamers are ramping up their offerings and luring customers away.
Inside the Numbers
In Q1, Netflix reported EPS of $3.53, topping expectations of $2.89 per share, a 6% drop from last year. Revenue was up 10% and just missed expectations at $7.87 billion vs $7.93 billion. It had $880 million in free cash flow.
However, traders were focused on the surprise drop in subscribers and forecast of another 2 million drop next quarter. Other streaming stocks like Roku (Nasdaq: ROKU), Spotify (Nasdaq: SPOT), and Disney (Nasdaq: DIS) were also down on the news.
The company said it was facing revenue growth headwinds due to its high household penetration and more competition. Previously, it had forecast adding 2.5 million subs in Q1, and analysts were looking for 2.7 million. In last year's Q1, the company had added 4 million subs.
However, 700,000 subscriptions were canceled as the company exited its business in Russia. In total, the company has 222 million paying subscribers, and it estimates that another 100 million households are accessing the service through account sharing.
Netflix has also hiked its price which could be affecting growth especially as consumers are more mindful of spending in an inflationary environment. It's also looking to add video games and is considering a cheaper, ad-supported tier.