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Netflix - subscriber growth lower than forecast

Sophie Lund-Yates, Equity Analyst | 21 April 2021 | A A A
Netflix - subscriber growth lower than forecast

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Netflix Inc Common Stock US$0.001

Sell: 585.67 | Buy: 586.00 | Change -6.86 (-1.16%)
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Netflix added just under 4m net new paid subscriptions in the first quarter, which was lower than management's guidance of 6m. The total number of paid subscriptions is now 207.6m globally, up 14% on last year. The group expects to add just 1m net new paid subscriptions next quarter.

There were improvements to Average Revenue per Membership, and total revenue rose 24% to $7.2bn. Together with some lower charges, operating income more than doubled to $2.0bn - a record.

Netflix will also begin a $5bn share buyback programme in the current quarter.

The shares fell 8.7% in after-hours trading.

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Our view

Putting it frankly, subscriber growth is the only number that really matters.

That's why first quarter results didn't go down too well with the market. The pandemic has been a double-edged sword. On one hand, stay-at-home-orders triggered a deluge of new subscriptions last year, helping profit and cash flow on the way. But on the other, 2020 simply poached growth from further down the line.

Continuing to grow the user-base is crucial. It allows Netflix to spread its rather enormous costs across a larger customer base, which is what will allow it to become cash flow positive. Netflix spends $11bn+ a year on new content, and this spending is pretty non-negotiable. Competition in the space is fierce, thanks to the likes of Amazon and Disney+. Stopping your subscribers from switching to a rival means you have to offer the latest must-watch.

We're encouraged to hear that existing subscribers are sticking with Netflix for now. But keeping those new customers is the hard part. The new year has only just begun, and realistically we won't get a full picture of how sticky the newer subscribers are until much later in the summer, when we've had a decent run of more normal life. Netflix hopes to have chewed through production delays too, and is promising big things for the content schedule in the second half.

There are of course positives. We can't knock the huge increases in profits, and the fact Netflix no longer needs to rely on external financing. This is great news. The group's even comfortable enough to start returning up to $5bn via buybacks, which shouldn't be overlooked.

There are some structural growth opportunities too. The pull of box office hits is much less potent these days - instead people are continuing to look for smash content from the comfort of their sofas. We think this could be a long-term behavioural shift. The group's head-start in local language content is also a real asset. As the more mature US and Canadian regions start to plateau, adding new subscribers will be the responsibility of emerging markets.

Let's not forget that streamed content is the new normal. And Netflix isn't just in the game, it had a hand in inventing it. We have faith in this giant, but the rest of the year is crucial. It will signal how firm a grip the group has on plans to build scale. If it can't do that, the outlook for cashflow will be less chipper, and Netflix would be in the spotlight for all the wrong reasons.

Netflix key facts

  • 12m forward Price/Earnings ratio: 50.3
  • 10 year average Price/Earnings ratio: 133.0
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First quarter results

Netflix said the miss on subscription growth was because of the heightened number of subscriptions added during the pandemic, and a lighter content offering because of production disruption. Retention of existing customers is in line with expectations.

The group said improved content offerings would be weighted towards the second half of the year.

Average revenue per membership (ARM) rose 5%, ignoring the impact of exchange rates. The US and Canada saw the biggest growth in ARM, rising 9% to $14.25, followed by Latin America with 5% growth to $7.39 and Europe, the Middle East and Africa - where ARM rose 4% to $11.56. The weakest performer was Asia Pacific, which grew 3% to post ARM of $9.71.

The group spent $3.3bn on new content, flat compared to the same time last year.

Higher revenue and lower content amortisation costs meant operating margins were 27.4%, compared to 16.6% the previous year.

Netflix generated $692m of free cash flow in the quarter, which was up significantly on the same time last year (2020: $162m). The group's on track to ''approximately breakeven'' in free cash flow terms this year.

As at the end of March, there was net debt of $7.2bn on the balance sheet, down from $8.1bn at the end of 2020.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.