Share price of Netflix (NFLX.US) plunged more than 7% during the Wall Street session on Wednesday. Steep downward move can be ascribed to the company's earnings report for Q1 2021, released after the close of the session on Tuesday, that markets saw as disappointing. However, was it really that bad? Let's take a closer look.
Subscriber growth disappoints
Netflix reported a 24.2% YoY jump in Q1 revenue to $7.163 billion, a result slightly higher than expected $7.136 billion. Net income jumped from $709.1 million in Q1 2020 to $1.706 billion in Q1 2021 (exp. $1.35 billion). As a result, earnings per share leaped from $1.57 to $3.75 (exp. $2.98).
Summing up, financial results for Q1 2021 were much better than the market expected. Why did Netflix shares plunge then? Company failed to deliver on new subscriber additions. Netflix reported a net increase of 3.98 million subscribers during the first quarter of 2021, compared to the company's own guidance of 6 million. While a big miss compared to market estimates is never a desired thing, the situation is even more ugly when a company significantly misses their own estimates. Management seems to have learned a lesson, issued a very conservative forecast for Q2 2021 - net addition of 1 million subscribers. If confirmed, it would mark the smallest addition since Q3 2014, when subscriber growth was negative.
Netflix subscriber growth has slowed significantly at the beginning of 2021. Comapny reported net addition of 3.98 million subscribers in Q1 2021, compared to company's own guidance of 6 million. Source: Bloomberg, XTB
Is it really that bad and disappointing?
Subscriber growth slowed significantly but investors should keep in mind that growth skyrocketed in 2020. People spent more time at home during lockdowns and it turned out to be a major boost for Netflix. As coronavirus restrictions are either being lifted or are not as severe as they used to, it should not come as a surprise that people have less time to watch movies or series. Subscriber data was disappointing as management set a high bar with its guidance, but it was not bad. After all, Netflix had a record 207.6 million subscribers at the end of Q1 2021, a 24% increase compared to pre-pandemic end-Q4 2019. Moreover, net subscriber change is expected to remain positive in the current quarter.
Another point to note is that while lifting lockdowns have slowed user growth, it has also accelerated pace of production of new movies and series. Additions to streaming offer may therefore help retain subscribers and lure new ones.
A big bearish price gap at the launch of yesterday's Wall Street session looks worrisome. However, Netflix stock has managed to stay above the $500 area, that has served as a support in the second half of March. Lower limit of the Overbalance structure can be found slightly lower at $486. In theory, as long as the price stays above $486, uptrend continues. Stock is trading slightly higher in today's pre-market trading. Source: xStation5
