Netflix Inc credited the pandemic with delivering record growth in 2020. Now it’s blaming the pandemic for the worst first quarter in eight years.
The streaming service added far fewer new customers than Wall Street expected in the first three months of 2021, even missing its own forecast by millions of subscribers. And the current quarter will be more challenging, Netflix said Tuesday, predicting a gain of just 1 million new customers – or a fraction of the 4.44 million projected by analysts.
The dismal growth sent its shares plunging as much as 13%.
Netflix has been warning for months that growth would slow after customers emerged from their Covid-19 hibernation, but few expected the company to stall so dramatically. The first quarter of 2020 was the strongest in its history, reeling in 15.8 million new customers, and Netflix’s pace was still brisk in the fourth quarter.
“We had those 10 years where we were growing smooth as silk,” executive chairman and co-chief executive officer Reed Hastings said on a webcast for investors. “It’s a little wobbly right now.”
Netflix added 3.98 million subscribers in the first quarter, compared with an average analyst estimate of 6.29 million and its own forecast of 6 million. That marked the weakest start of a year since 2013, when Netflix added about 3 million customers. If the company’s forecast for the current quarter holds, it will be the worst three-month stretch for Netflix since the early days of its streaming service.
Netflix blamed a “Covid-19 pull-forward” effect, meaning the pandemic accelerated its growth in 2020 while everyone was stuck at home and needed something to watch. Now that surge is taking a toll on the company’s 2021 results.
“It really boils down to Covid,” Spencer Neumann, the company’s chief financial officer, said on the webcast.
A lack of new shows also contributed to the slump, the company said. While there were popular hits available, like “Bridgerton” and “Cobra Kai,” fresh releases tailed off after mid-January and growth faltered.
The pandemic has pushed the release of many of the company’s key titles into the back half of this year. Production was interrupted in 2020 due to fallout from the pandemic. Netflix was able to sustain its release schedule for the first several months of Covid lockdowns because it had already finished many projects. But most movies and programs that were supposed to be in shooting last year were either postponed or canceled.
“There was nothing to watch this quarter,” said Michael Nathanson, an analyst with MoffettNathanson LLC.
What Bloomberg Intelligence says
“It’s important not to confuse near-term noise in user gains with Netflix’s longer-term thesis, which we believe, remains stronger than ever.” – Geetha Ranganathan, BI senior media analyst
Netflix rejected the idea that competition factored into its results, noting that its growth slowed globally – not just in the crowded US streaming market. Disney+, HBO Max and Peacock don’t yet compete with Netflix in many parts of the world. Still, the company is facing more rivals than ever, and some of the services are less expensive than Netflix, which raised its US prices in October.
While production has resumed in every country but Brazil and India, that won’t help Netflix until later this year. Its slate in the current quarter is also light.
The company’s answer to the challenges remains the same as ever: produce more shows. Netflix plans to spend $17 billion in cash on programming this year, up from $12.5 billion last year and $14.8 billion in 2019. It’s prioritizing investments in programming outside the US, where most of its new customers live.
Europe continues to be a bright spot for Netflix. The streaming service added 1.81 million customers across Europe, the Middle East and Africa, making it the leading region for the company. “Lupin,” a French heist thriller, was the service’s most popular new series in the quarter. Asia is the company’s second-fastest growing region.
Even with growth decelerating, Netflix is in the strongest financial position in its history. It reported net income of $1.71 billion, more than double a year ago, and generated free cash flow of $692 million during the quarter. While some of this is due to the curbs in production, it also reflects a stronger foundation. The streaming service is profitable in many new markets, such as South Korea. Earnings amounted to $3.75 a share last quarter, ahead of the $2.98 estimate.
After years of borrowing to fund production, Netflix has said it no longer needs to raise outside financing to fund day-to-day operations. The company plans to reduce debt and will buy back up to $5 billion of shares.
Neither executives nor investors can be certain whether the trajectory in the first half of the year is temporary, or a sign of a maturing business. Netflix fell as much as 13% to $480 in extended trading, which would be a 2021 low. The stock had risen 1.6% this year through the close Tuesday in New York.
When asked if it was time for the company to expand into a new business, executives insisted that plenty of growth remained in entertainment. But they did tease two potential areas of expansion in the years ahead: consumer products and video games.
In any case, the main focus will be on streaming more hit shows, said co-CEO and content chief Ted Sarandos.
“What we have to do, week in and week out, is deliver programming our members love,” he said.