Product | Heterogeneous Finance
Author | Night fork snow
Disillusioned, Netflix's high growth is gone.
After the U.S. stock market on Tuesday, April 19, Netflix announced its first quarter results for fiscal 2022. As a key indicator of Netflix, the data disclosed by the financial disclosure of the paying user in this quarter is not optimistic. The data showed that Netflix's total number of paid subscribers in the first quarter fell by 200,000 month-on-month, well below its guidance of 2.5 million, which is the company's first user loss since 2011.
What worries investors even more is the growth of Netflix's paid users in the next quarter. Netflix expects its paid subscribers to further decrease in Q2, down to 2 million, triggering more pessimism among investors and causing the stock price to plummet, with Netflix's stock plunging more than 26% after hours.
At present, although Netflix is still the king of streaming media, but it is facing the strong encirclement of Apple, Disney and other giants, under the situation of peaking traffic dividends, the competition between users in streaming media is in stock competition, Netflix simply relies on the mode of charging membership fees, can it still meet investors' expectations and fantasies about Netflix's future growth?
Lack of high growth momentum, Netflix investors disillusioned?
In the first quarter of 2022, Netflix handed over a disappointing answer sheet.
First, for the first time, the world's total paying subscribers experienced churn. Typically, the first and fourth quarters of each year are the quarters with the fastest user growth. However, in the first quarter of 2022, the total number of Netflix paid subscribers decreased by 200,000 month-on-month, far below the previous guidance of 2.5 million, and the first loss in many years was much lower than market expectations, setting a new low of net growth in a single quarter for many years.
Netflix disclosed in its earnings report that the suspension of Russian services led to the loss of 700,000 users, and if this impact is excluded, the number of paid subscribers in the first quarter will increase by 500,000.
According to Netflix's latest financial report data, as of the end of the first quarter of 2022, the total number of paid users of Netflix's global streaming video services decreased from 22,184 at the end of 2021 to 22,164.
The slowdown in user growth can be attributed to several factors:
First, with the normalization of the epidemic, the disappearance of the epidemic dividend, and the gradual liberalization of the economy, the entertainment methods outside the home have increased, which has caused some of these users to cancel their subscriptions to Netflix.
Second, high-quality original content has always been the advantage of Netflix, and explosive dramas help to pull new ones, but Netflix did not produce explosive dramas in the first quarter, and several dramas are basically the follow-up of the previous quarters, and the performance is flat. It is worth mentioning that since July last year, Netflix has acquired three game developers, and Netflix seems to be trying to drive user scale growth through games.
Third, the increase of streaming media platforms has given users more choices, and some users have been diverted by other streaming media platforms. As the base camp of Netflix in the United States and Canada, it is difficult to have a new breakthrough in user growth, and it is good for the basic disk to remain stable. The increase in new users of Netflix depends more on overseas markets, such as Asia-Pacific, Europe, the Middle East and Africa. Sources say Netflix suspended its presence in Russia in March and halted the development and acquisition of all Russian-produced or commissioned TV shows and movies, with companies including JPMorgan Chase and Truist estimating Netflix having between 1 million and 2 million paying subscribers in Russia. The Russo-Ukrainian war could also affect the number of users in Europe, the Middle East and Africa.
Fourth, Netflix's price increase may increase the user churn rate. Users in some emerging markets such as Mexico and India are very sensitive to prices, so once Netflix implements the price increase strategy, it is likely to cause the loss of some users.
Second, revenue growth has slowed down significantly.
According to the data, in the first quarter of 2022, Netflix achieved revenue of $7.868 billion, an increase of 10% year-on-year, lower than the market expectation of $7.93 billion.
The company said in a statement: "Our revenue growth has slowed significantly. As we predicted, streaming is beating traditional media, and the company's products are very popular worldwide. However, our relatively high household penetration – including a large number of households with shared accounts – combined with competition, is creating headwinds for the company in terms of revenue growth. ”
The user membership fee is said to be the most core source of income for Netflix, so the size of paid members and ARPU (average revenue per user) will directly affect Netflix's revenue and profits, which is why the data level in the user guide will have an impact on the stock price.
As can be seen from the above chart, the ARPU of Netflix's global subscribers has not increased significantly. When ARPU growth is slow, its revenue growth is mainly achieved by the scale growth of paid members. Netflix on the one hand to consider user retention, on the other hand, but also to consider the user to pull new, high-quality blockbuster dramas can effectively help the platform to retain old users, attract new users.
According to Deloitte, by 2022, at least 150 million paid subscriptions to streaming video-on-demand (SVOD) services will be cancelled globally, a staggering churn rate of up to 30% per market. Therefore, if you want to retain and attract users with the output of high-quality content, it will inevitably lead to an increase in operating costs, especially the increase in content costs.
Netflix will spend $17 billion on content in 2021 and is expected to spend about $19 billion in 2022. The increase in costs will squeeze profit margins to some extent.
Finally, the only reassuring thing for investors was that the company's profits still exceeded expectations, earnings per share of $3.53.
How does Netflix stabilize its "jianghu status" and investors?
Warner Media's HBO Max and Discovery+ have 74 million and 22 million streaming subscribers, respectively, by the end of 2021, the data shows, so they may have a total audience of nearly 100 million subscribers today (there may be some who subscribe to both at the same time). Disney served 196.4 million subscribers across all streaming services in the most recent quarter.
From the perspective of user scale, Netflix is still the market leader in the field of streaming media. But can the "jianghu position" of its market leader be stabilized in the face of strong enemies?
First of all, the competition of giants in the field of streaming media has entered a white-hot situation. Previously, Netflix management acknowledged the growing threat of competition. At present, most of Netflix's competitors' service pricing is lower than Netflix' service pricing, and when the competitor's content has a certain degree of advantage, low service pricing will have a substantial impact on Netflix.
Unlike Netflix's slowing growth, its competitors are growing, and Apple TV beat Netflix with "Sound-Sounding Girl" to become the first streaming film to win the Oscar for Best Picture.
In the fourth fiscal quarter of last year, revenue from Apple's services business, which includes Revenue from Apple TV subscription fees, rose about 24 percent to $19.5 billion. Toni Sacconaghi, an analyst at Bernstein, an investment research firm, said Apple TV's revenue in fiscal 2021 almost doubled year-on-year, and is estimated to have increased to $2.2 billion.
It is reported that the current service pricing of HBO Max, Amazon Prime Video, and Disney+ is lower than that of Netflix, which may have a more serious substantive impact on Netflix.
In addition, major technology giants are also increasing their investment in content. Morgan Stanley expects Disney's investment in streaming content to grow 35 to 40 percent year-over-year, after Disney said its annual content budget would grow to $8.5 billion by 2024. Apple TV's annual content budget has also increased from the initial $1 billion to the current $6.5 billion.
Secondly, where is the next growth point for Netflix?
Previously, globally, Netflix announced that it expected to add only 2.5 million new subscribers in the first three months of this year, well below the 4 million in the first quarter of 2021. The news helped its market value evaporate nearly $45 billion, and investors worry that Netflix's glory days are over.
Netflix disclosed in its earnings report that its operating margin will remain around 20% due to its desire to re-accelerate revenue growth through "improved services and more effective multi-family sharing monetization".
To stabilize investors, Netflix needs to find the next growth point. We can preset which strategic shifts can help Netflix find new growth points.
First, in addition to entertainment and original content, games, Netflix can provide a wider range of content, such as adding news and sports-related columns. Breaking news (such as the Russo-Ukrainian war) and sporting events can help Netflix attract more users; broaden its content audience and expand its reach of new users.
Note: Netflix doesn't dabble in live sports that require high licensing fees, nor does it offer any live news channels.
Second, liberalize advertising and make more sources of income. After all, user traffic has basically peaked, and the price increase strategy is a double-edged sword, it is impossible to continue to increase prices without an upper limit, so expanding the streaming service through ad-free and ad-support options is also an option.
Note: Netflix has repeatedly refused to introduce a cheaper or free ad-support layer to get more viewers. The increase in advertising affects the user experience for paid members. But from an investor's point of view, Netflix has added another source of revenue, and revenue diversification is not necessarily a bad thing.
Of course, whether Netflix's future strategy will be transformed as described above is unknown, but at present, from the current competitive situation in the industry and the net increase in paid users, Netflix's high growth is gone.