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Subscriber loss

One of the reasons why investors were drawn to Netflix shares was because of the company’s growing subscriber base. As people switched from cable TV to on-demand streaming, Netflix gained new members quarter after quarter.

But that trend has come to an abrupt stop.

Netflix reported 221.64 million paying subscribers globally at the end of Q1 — 200,000 fewer than what it had at the end of Q4. That marked the online video streaming gorilla’s first subscriber loss since 2011.

The news came as a shock because in the previous earnings report, the company said that it expected to add 2.5 million subscribers in Q1.

Company guidance also disappointed Wall Street. Netflix says it expects to lose another two million subscribers in Q2.

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Slowing revenue growth

The company started its shareholder letter by saying, “Our revenue growth has slowed considerably.”

For Q1, revenue came in at $7.87 billion — up 9.8% year-over-year but below management’s forecast of $7.9 billion. Earnings per share was $3.53, down from the $3.75 generated in the year-ago period.

To help boost its financials, Netflix plans to crack down on password-sharing.

The company estimates that there are more than 100 million households using a shared password, including over 30 million in the U.S. and Canada. If a fraction of those millions of households starts paying themselves, it could mean a substantial revenue boost.

The company may also finally take up advertising. While Netflix has resisted advertising in the past, co-CEO Reed Hastings said in the earnings conference call that they are “quite open to offering even lower prices with advertising as a consumer choice.”

What’s next?

Given the stock’s massive tumble, sentiment is clearly bearish towards Netflix — especially on Wall Street.

Wells Fargo analysts downgraded Netflix from overweight to equal weight on Wednesday, noting that the company is “firmly on the defensive” and its narrative “is dunzo for now.” The bank also lowered its price target on the shares from $600 to $300.

Meanwhile JPMorgan downgraded Netflix from overweight to neutral and cut its price target from $605 to $300.

“Near-term visibility is limited, our 2022 net adds come down sharply from 16 million to 8 million, & there’s not much to get excited about over the next few months beyond the new, much lower stock price,” JPMorgan writes.

On a positive note, those lowered targets are still well above Netflix’s current price of around $225 per share.

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Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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