Netflix

Shares of Netflix tanked 25.7% in extended-hours trading on Tuesday after the content streaming company reported a loss of 200,000 subscribers, declining for the first time in over a decade. More worryingly, the company expects these subscriber losses to continue into Q2, and has projected paid subscriber losses of 2 million.

This subscriber loss in Q1 was exacerbated by the loss of 700,000 subscribers in Russia, after the company’s suspension of services there. Excluding this, 500,000 net new subscribers would have been added in the quarter.

There has been a significant deceleration in Netflix’s revenue growth rate, too. Netflix’s revenues grew year-over-year by only 9.8% in Q1 of FY22 to $7.86 billion versus a year-over-year growth rate of 24.2% in the same period a year back.

The company acknowledged in its letter to shareholders that “our relatively high household penetration – when including the large number of households sharing accounts – combined with competition, is creating revenue growth headwinds.”

Netflix pointed to four inter-connecting factors at work for its slowing growth. This includes higher password-sharing households, macroeconomic factors like higher inflation, rising competition, and the adoption of connected TVs.

According to NFLX, in addition to its 222 million households who have a paid membership, it estimates that its subscription is being shared by over 100 million households. This includes more than 30 million password-sharing households in the U.S. and Canada alone.

The company made it clear that it intends to monetize these households. As a part of this plan, NFLX rolled out a plan in March in countries like Chile, Peru, and Costa Rica that would enable households to add an extra member to their existing plans or transfer their membership profiles to a new account for a small charge.

In a bid to augment its revenues, the company stated on its earnings call that it was also exploring an ad-supported version of NFLX for lower-priced subscription tiers.

Over the long term, NFLX expects to sustain revenue growth in the double-digits and is still projecting to achieve an operating margin in the range of 19% to 20% for FY22.

However, Piper Sandler analyst Thomas Champion was not impressed with NFLX’s Q1 results and downgraded the stock to a Hold from a Buy. Additionally, he almost halved his price target from $562 to $293, just above the lowest price target of $235 on the Street. Champion’s price target implies an upside potential of 23% to early morning trading levels on Wednesday.

The analyst expects subscriber losses to continue into the second quarter while revenue growth is likely to continue to decelerate well into 2023. Champion noted in his research report, “It’s a lower growth, lower visibility model, prompting us to move to the sidelines.”

Other analysts on the Street also sided with Champion and are sidelined with a Hold consensus rating based on 10 Buys, 25 Holds, and three Sells. The average NFLX stock forecast is $366.97, implying 54.1% upside potential from current levels.