Shares of Netflix (NASDAQ:NFLX) are down over 26% in pre-open Wednesday after the streaming company reported disappointing Q1 results and Q2 guidance.
Netflix reported EPS of $3.53 in the first quarter, down from $3.75 in the year-ago period and above the consensus estimates of $2.91 per share. Revenue came in at $7.87 billion in the period, up 9.8% YoY and missing the expected $7.95 billion.
Streaming paid net change was reported at -200,000, compared to +3.98 million in the year-ago quarter and estimates of +2.5 million. This marks the first time in the last decade that net add growth has turned negative.
The company reported 221.64 million streaming paid memberships in Q1, up 6.7%, though below the consensus projection of 224.5 million. NFLX reported a Q1 operating margin of 25.1%, down from 27.4% YoY and above the estimates of 22.2%.
“While we work to reaccelerate revenue growth - through improvements to service and more effective monetization of multi-household sharing - we’ll be holding operating margin at around 20%,” the company said.
For the second quarter, Netflix expects EPS of $3.00, just below the analyst consensus of $3.02 per share. The company expects Q2 revenue of $8.05 billion, also below the projected $8.23 billion.
Streaming paid net change is expected to be down by 2 million, while analysts were looking for a 2.4 million growth.
Netflix expects streaming paid memberships of 219.64 million in Q2, missing the expected 227.7 million. The company anticipates a 21.5% operating margin, almost in line with analysts’ expectations of 21.6%.
Netflix said that suspension of its platform in Russia and losing all Russian paid memberships led to a 0.7 million loss in paid net additions. Excluding this, Netflix’s paid net additions stood at +0.5 million.
The company said the boost it received from the coronavirus pandemic has clouded the picture until recently. Netflix also noted that the increasing competition, as well as the vast number of households sharing accounts, is weighing on the company’s revenue growth.
At least 9 analysts downgraded Netflix stock following disappointing results.
Stifel analyst Scott Devitt downgraded to Hold from Buy with a $300.00 per share price target, down from $460.00, to reflect “materially” lowered estimates for 2022 and beyond. Expectations are now reset for subscriber additions and margin expansion, added Devitt, while Netflix focuses on improving its growth profile.
“While some headwinds highlighted by management (weaker macro, inflation) should prove to be transitory, the company will still need to address a number of more secular issues likely weighing on growth, including heightened competition, potential maturity in core markets, and the prevalence of password sharing. Netflix has several levers to possibly reinvigorate growth, including introducing an ad-supported subscription plan and improving monetization of shared accounts; however we note that both offerings are in their early stages of development and are unlikely to materialize in results until 2H:23/2024,” Devitt said in a client note.
Barclays analyst Ross Sandler reiterated an Equal Weight rating and lowered the price target by 28% to $275.00 per share after Q1 results signaled that the streaming party may be over.
“The company’s topline growth profile may be more in the high single/low double digit range going forward rather than the 25-30% range pre Covid, which obviously creates a very different narrative. This in turn should make it more difficult to grow margins and free cash flow, thereby unwinding the growth algorithm and support for its premium valuation. The company also seemed to talk down its near term margin growth by making it contingent on re-accelaration of revenue growth,” Sandler said in a client note.
Netflix stock price is now indicated to open at $256.00, the lowest level seen since September 2019.
By Senad Karaahmetovic