Make no mistake: Netflix’s (NFLX) declining subscriber base is a major setback for the company. Santosh Rao, the Head of Analysis at Manhattan Business Partners, told Yahoo Finance (video above).
“This is a body blow to the bull case,” Rao said, “definitely to the Netflix story, the subscriber story.” “For so long, Netflix has been all about subscribers… and it’s really taking it on the chin here.”
Netflix’s stock plummeted in response to its most recent earnings round, with shares dropping more than 35% in after-hours trading on Wednesday. Netflix lost about a million subscribers after withdrawing from Russia as a result of its invasion of Ukraine, resulting in a net loss of 200,000 subscribers in the first quarter of 2022.
The Internet is buzzing with theories about what’s causing the decline and what Netflix should do next, from excessive subscriber churn to the company’s exploration of an ad-supported subscription. However, one factor stands out, according to Rao: it’s time for Wall Street to rethink its expectations.
He stated, “The entire story has to be re-evaluated from a lower base now.” “At this point, the multiples are becoming more compelling, but we need to see that the growth story is still intact and that they have a strategy in place to deal with the challenges ahead.”
Regardless of how the markets react to Netflix’s earnings, the company appears to be regulating, as evidenced by the release of much-anticipated content such as the most recent seasons of “Stranger Things,” “Peaky Blinders,” and “The Umbrella Academy.” Wall Street is also interested in the company’s newly announced efforts to offer an ad-supported subscription, as well as its efforts to control password-sharing. In an April 20 note, Raymond James analyst Andrew Marok highlighted the potential for ad-supported providing as a major positive. He also mentioned that the company has healthy profit margins.
“Netflix reported operating margins of 25.1 percent in 1Q22, compared to guidance of 22.3 percent,” Marok wrote.
Growth through more than one means
According to Rao, as Netflix moves forward, the company will want to expand both its content strategy and geographic reach.
“They need to get into some other sticky things – like more gaming, maybe sports, and, of course, advertising revenue,” he said. “They need to pull all of these additional levers because this isn’t working.” The traditional core business, particularly in their core markets, may have peaked.”
Netflix has a number of options ahead of it, but one of the most powerful is international expansion. According to Rao, India and Japan are key development markets for Netflix, and there is still room to expand the platform’s footprint in EMEA.
Netflix agrees, according to a shareholder letter outlining the strategies the company is putting in place to thrive on a global scale.
“To support this, we’ve been developing capabilities such as creative development, personalization, and language presentation/localization,” the company stated in its shareholder letter. “Netflix is now producing films and television in over 50 countries, with a high level of integration in the local entertainment ecosystem, resulting in the creation of blockbusters from every region.” In fact, three of our six most popular television seasons of all time are non-English titles: Squid Game, La Casa de Papel Part 4 and All Of Us Are Dead.”