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Why Netflix's growth story may not be over as Wall Street frets subscriber woes

·Senior Reporter
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Netflix (NFLX) shares plunged more than 20% on Friday — its biggest decline since October 2014 — after the streaming giant reported slowing subscriber growth in the fourth quarter, amid an already crowded streaming landscape.

The platform added a relatively weak 8.3 million subscribers in Q4, and forecasted a net add of only 2.5 million subscribers in the current quarter, compared to 3.98 million during the first quarter last year. But top media analysts have argued that this is not time to panic.

"This is not over," LightShed Partners' Rich Greenfield told Yahoo Finance Live this week. "The reality is that we're still very early in the streaming conversion from linear TV to streaming television."

The analyst dismissed the notion that Netflix has hit some sort of a ceiling, noting that the company's roughly 222 million subscribers hasn't even touched the service.

"There's probably 600 to 800 million homes with high enough quality broadband to support Netflix streaming, or any streaming service," he explained.

"There's still lots of growth to go [but unfortunately] it isn't always the pretty straight line that the market would like," Greenfield added.

In 2021, the stock underperformed the S&P 500 (^GSPC) after a blockbuster 2020 that saw streaming players soar on the wings of COVID-19 inspired "stay at home" trades.

Fueled by the shift to remote work and online school, subscriber numbers surged by a record 25.9 million additions in the first half of that turbulent year, before dropping off significantly as the effects that bolstered the "stay at home" trade ran its course.

Bank of America, which lowered its price target to $605 but reiterated its "Buy" rating, suggested that Netflix's earnings report could shift Wall Street's mindset moving forward.

"[Netflix] is actually very confident in the next several years. It's Wall Street that has no confidence..."Richard Greenfield, Lightshed Partners

"Investor attention is likely to shift beyond a singular focus on subscribers to the potential long term profitability of these streaming businesses," the bank said in a new note published on Friday.

"Streaming industry growth will be largely driven by international markets as it appears the U.S. is approaching peak penetration levels," the note continued, adding that "large incumbents such as Amazon and Netflix will retain a top tier position along with Disney and Warner Bros. Discovery."

Netflix has re-focused its attention on international markets with BofA seeing "continued growth in Asia" as a key driver in 2022.

 

'More shots on goal than anyone else'

Squid Game (Courtesy: Netflix)
Squid Game (Courtesy: Netflix)

Netflix has already set the tone for the upcoming year, hiking its U.S. basic plan by $1 to $9.99 per month. A standard plan now costs $15.49 (up from $13.99.), and the company's premium plan increased to $19.99 per month from $17.99.

Netflix COO Greg Peters said during its earnings call that "customers are willing to pay for great entertainment," with fan favorite originals including "Ozark," "Bridgerton," "Stranger Things" and "The Crown" all set to make triumphant returns this year.

And compared to other streamers, LightShed's Greenfield credited Netflix with taking "more shots on goal than anyone else." He cited the surprise success of "Squid Game" as one recent example, with a record 142 million people watched the hit South Korean show in its first four weeks.

"Nobody had 'Squid Game' as the breakout hit that was going to fuel Q4 a year ago," the analyst said, surmising that Netflix will surprise people this year due to "the amount of shots on goal that they're taking."

Still, Netflix acknowledged that competition may be "affecting marginal growth some" during its earnings call on Thursday night. While the company still leads in paid users — Amazon Prime Video has 175 million subscribers and Disney’s Hulu, Disney+, and ESPN+ have a total of 179 million subscribers — other streaming peers are quickly catching up.

Despite the competition, Greenfield reiterated that Netflix is uniquely positioned thanks, in large part, to its commitment to content.

"There is certainly a fear that if Netflix doesn't have enough content to continue to grow subscribers, imagine what everyone else has to do, the analyst said. Competitors "are spending far, far less than Netflix."

Greenfield argued investors should breathe a sigh of relief knowing that the streamer is continuing to spend billions of dollars on content around the globe.

"If Netflix was telling you, 'Look, it doesn't make sense to spend more money' [then] that's a really negative sign...but, instead, they're investing more in content all over the world," Greenfield explained. The company is "actually very confident in the next several years. It's Wall Street that has no confidence in that and is just worried that this growth story."

Bank of America agreed that content spending will remain a focus point in the space, warning that "sub-scale providers will struggle to keep up with the dramatic increases in content spending and will ultimately need to find additional partners to reach the scale required to compete on a global scale."

Alexandra is a Producer & Entertainment Correspondent at Yahoo Finance. Follow her on Twitter @alliecanal8193

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