It was a rough fourth quarter for Netflix (NFLX +0.44%), and the near-term outlook isn't very encouraging. Shares of the streaming service were hit hard on Thursday afternoon after the company posted fresh financials, down roughly 20% in after-hours trading within an hour of announcing results.
Netflix fell short of the guidance it provided for its most important metrics, and the one area where it proved resilient bears an asterisk. New guidance for its current quarter is also underwhelming, to say the least.
Netflix is still the undeniable top dog in this niche, but it leads one to wonder if the price hike it rolled out for U.S. subscribers over the weekend was a smokescreen or a consolation prize. Let's break down what went wrong at one of the most dynamic consumer-facing companies over the last 20 years.
Image source: Getty Images.
Red notice
Netflix has proven surprisingly mortal with its prognostications lately. This is the seventh time in the last five years -- and the second time in the 2021 reporting year -- that the service fell short on its forecast for how many subscribers it would have by the end of the period.
The miss itself wasn't that bad, at first glance. Netflix was targeting 8.5 million in net adds and closed with just 8.3 million more paying accounts than it had at the end of September. It's the smallest of the seven shortfalls over the past five years. The problem is that a lot of good things happened to Netflix after its forecast.
Squid Game was already a global sensation, but Netflix would go on to put out Red Notice in November and Don't Look Up in December. The two films would become the platform's two most-watched new releases. With all of that engagement, it was probably going to be hard to cancel Netflix, so coming up short means that it really dropped the ball in gross subscriber additions.
Let's turn to the top line. Netflix was modeling 16.1% in revenue growth. It was close -- up 16% to $7.7709 billion -- but that mid-October gazing into the crystal ball was also before things went so swimmingly well on the content-engagement front.
The news gets better as we work our way down the income statement. Operating margin of 8.2% is the worst we've seen out of Netflix since the final frame of 2018, but Netflix was actually bracing the market for a weaker 6.5% showing. Net income of $1.33 a share also trounced both the $0.80 it was forecasting in October and the $1.19 it rang up a year earlier.
The asterisk here is that the bottom-line number included $104 million in income as a one-time non-cash realized gain on reassessing its euro-denominated debt. The good news behind the asterisk is that Netflix still would've beaten its forecast without the one-time benefit. The bad news is that it wasn't enough to save a rough quarter.
Expectations were low. Netflix chose to play limbo.
Skid game
Guidance is where a bad report turned downright dreadful. Netflix expects to add a mere 2.5 million streaming subscribers to its global total by the end of March. The 10% in year-over-year revenue growth that it's targeting will be its weakest showing since late 2012. Analysts were banking on a 13% increase in revenue.
Margins and earnings historically dip in the fourth quarter, given the heavy push for content. Netflix naturally sees sequential improvement, but not as strong a bounce as it achieved a year earlier. The $2.86 a share that Netflix expects to earn is less than the $3.75 a share it posted in the first quarter of last year and the $3.45 a share that Wall Street pros were eyeing this time around.
This messy report leads to one head-scratching question: What was Netflix thinking when it increased prices last week? It actually had its best quarter with net additions -- despite the bad quarter -- in the U.S. and Canada region since the early days of the pandemic. It also provides hope for investors that revenue will keep growing at a stronger clip than slowing subscriber growth.
Don't Look Up is the latest hit on Netflix. The star-studded film on the leading platform among streaming services details a nation divided about the reality of an Earth-obliterating comet. The camp in power embraces the titular sentiment. Don't look up, and maybe it'll go away.
It won't. As a Netflix shareholder and longtime bull, I'd love to offer a similar argument.
Don't look down. The share price is plummeting, and the numbers say a comet is on a collision course with its business model. The competition is getting stronger, and Netflix doesn't have the pricing elasticity it used to.
Don't look down, and maybe it'll go away. It won't.
