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'The jig is up on Netflix' as subscriber growth slows: analyst

Emily McCormick
·Reporter
·5 min read
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Netflix's (NFLX) striking miss on first-quarter subscriber additions vindicated some analysts' views that the future growth prospects for the company would start to dwindle once users started going out again after the COVID-19 pandemic. While others remain bullish on the streaming giant.

"Netflix, they’re in a damned if you do, damned if you don’t situation. Investors are now demanding cash flow. They burned through tens of billions of dollars building the platform," David Trainer, chief executive officer of investment research firm New Constructs, told Yahoo Finance. "I think people are going to start to see that the jig is up on Netflix."

The streaming company reported on Tuesday that it added 3.98 million new subscribers during the first three months of 2021. That came in sharply below consensus expectations for 6.29 million subscribers, and plunged from the record 15.77 million subscribers the company added in the same three months of last year, when consumers stuck at home at the start of the pandemic turned in droves to the platform for entertainment.  

Guidance for the current quarter also came as a disappointment. Netflix expects to add 1 million new subscribers in the second quarter, whereas Wall Street analysts were looking for 4.44 million.

To Trainer, the deceleration marks just the first symptom of more pain to come for Netflix, especially as other streaming competitors like Disney+, HBO Max and Peacock have started to gain ground.

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"It’s just not nearly a profitable enough enterprise to compete with the likes of the movie studios and in particular Disney, which has multiple ways to monetize content. Netflix has one way: Streaming over the internet," Trainer said. 

"That’s not a big competitive advantage considering that we’ve got I don’t know, a dozen, 25 different streaming alternatives these days? So I think the jig might be up on Netflix, and I think the same is going to be true from a lot of these work-from-home themes," he added. "Money kind of flows in a manic way these days, right? Tons of money went into work-from-home. Now tons of money’s going into crypto. And it’s going to move around pretty quickly. And I think once you become unpopular, it can become pretty painful if the fundamentals aren’t there to support the valuation."

'Buying opportunity'

Other analysts, however, were quicker to shrug off Netflix's subscriber miss, noting that the underlying fundamentals of the company remain intact and have actually improved on many measures. Plus, the record-setting year of subscriber growth that Netflix experienced last year made building further on those levels all the more difficult. 

SPAIN - 2021/03/23: In this photo illustration the Netflix App seen displayed on a smartphone screen in App Store and the Netflix logo in the background. (Photo Illustration by Thiago Prudêncio/SOPA Images/LightRocket via Getty Images)
SPAIN - 2021/03/23: In this photo illustration the Netflix App seen displayed on a smartphone screen in App Store and the Netflix logo in the background. (Photo Illustration by Thiago Prudêncio/SOPA Images/LightRocket via Getty Images)

"People aren’t talking about the fact that they beat revenue. People aren’t talking about the fact that they crushed EPS [earnings per share] estimates," Nat Schindler, Bank of America director of equity research, told Yahoo Finance. "People are talking about the fact that they missed net subscriber additions in the quarter over last quarter. Not year-over-year growth, not even total subscribers – which was off by less than 1%. So this is really a tertiary metric, and it makes it extremely volatile. It’s incredibly difficult to predict what’s going to happen in a given quarter." 

"I look at this as a buying opportunity largely because if you look at what has happened in the past, in the times that Netflix has missed in the past on this really hard-to-predict number ... the stock has rebounded immensely," Schindler added. "In the last five times this has occurred over the last five years, the stock is up 78% within a year from the close the day after missing. So we see this as something that really, fundamentally, nothing has changed." 

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Netflix shares fell 10% after announcing earnings Tuesday after market close. The stock was down nearly 7% around noon on Wednesday.

Others also said Netflix is likely to see a re-acceleration in sign-ups later this year once later seasons of popular series like "The Witcher" and "Money Heist" return after COVID-related production disruptions last year. 

"If you take a step back and remember that they added 26 million subscribers in the first half of last year, 37 million for the entire year, those numbers are eye popping by any measure," CFRA analyst Tuna Amobi told Yahoo Finance Live. "So they were going to be comping against this huge number. And also the fact that the production was shut down, as you know, because of COVID-19, and they are now starting to get back into that. So the content slate was fairly light, which pushed back a lot of the popular returning shows to the second half." 

The spotlight on Netflix's miss on new subscriber numbers also pulled focus from other key metrics like cash flow. The company reiterated it believes it is "very close to being sustainably" free cash flow positive, after posting its first full-year of positive free cash flow since 2011 in 2020. Netflix also said expected free cash flow to be around breakeven in 2021, and added it "no longer [has] a need to raise external financing" for its day-to-day operations.

"On a fundamental basis, on a balance sheet basis, on a liquidity basis, it’s a very strong company," Santosh Rao, head of research at Manhattan Venture Partners, told Yahoo Finance Live. "That’s been the bear case with Netflix all along: It’s overpriced, it can’t do it, they cannot fund themselves. The company has come out and said they can fund themselves. They’re not going to the debt market. They have enough cash flow to fund their own shows. And they have a good library already. They’ve benefited from COVID, in fact, compared to the competitors, because they had a good slate already."

"They have a good lead. It’s their market share to lose," he added. "They’re still very much in play and ahead of the game.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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