Wednesday, Apr 21st 2021

Netflix stumbles on subscriber miss


On Wednesday morning, Netflix stock dropped -7% after reporting Q1 subscriber growth numbers that came in significantly below forecasts (4M vs. an estimated 6M).

While revenue, margins, and in particular, cash flows all came in very strong, around earnings dates Netflix trades almost instinctively on subscriber growth expectations.

This is both because of that metric's position at the top of Netflix's growth algorithm, as well as the historical dearth of other meaningful cash flow and profit metrics on which to evaluate Netflix's performance.

While some analysts will be quick to interpret the subscriber miss primarily as a signpost of the end of the pandemic period growth, we believe it's worth noting that it's likely just as much a reflection of the simple difficulty of forecasting subscriber metrics over a historically unique period.

In fact, over the past 5 pandemic quarters, Netflix has consistently over and undershot all of its subscriber forecasts, with an average deviation of +2M (and a range of deviations spanning from -2M to +9M).

Netting all of that out, from the beginning of 2020 through next quarter's forecasts, Netflix is on track to surpass its total subscriber projections by +8M on net.

Net Adds

We expect quarterly subscriber metrics will continue to be volatile over the coming quarters with pullforwards giving way to givebacks that on net we expect will land on the positive side for Netflix (as the data currently suggests).

But in the bigger picture, what we believe is more important is that Netflix's user experience flywheel simply remains strong and turning. This is something we were pleased to see indicated by the other key metrics Netflix reported on.

For example, in Q1 Netflix reported seeing user engagement increase year-over-year (vs. the tough Q1 2020 compare) while churn simultaneously decreased despite a trifecta of seemingly major headwinds: increased reopenings, price hikes, and clampdowns on password sharing.

We believe that is a remarkable feat, especially considering those outcomes were achieved despite a slowdown in content spending, which in our view is indicative of the durability and long tail nature of Netflix's content investments.

Stepping back, as cash flows and capital allocation increasing becomes part of Netflix's earnings story, we believe investors will increasingly broaden their focus beyond quarterly subscriber growth metrics.

Netflix is maintaining its guidance for hitting cash flow breakeven this year, and in Q1 posted free cash flows that more than 3x'd analyst estimates.

While this was of course partially a result of the lower content spending environment (which will re-accelerate in the back half of this year), we believe those results are a powerful indication of what Netflix's end state economics could look like.

We'll continue to closely monitor Netflix's subscriber growth progression as it navigates the transition into an increasingly re-opened world.

In the meantime, we're pleased to see management is similarly prepared to capitalize on any remaining air pockets afforded to it by the market's focus on quarterly net adds with its newly authorized $5 billion share buyback authorization.

As of this writing, NFLX was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
Back to Research ↗

Learn with titan

Investment articles and resources

Become the smartest investor you've ever been through straightforward, easy-to-read investment articles.

How to Analyze a Stock: A Beginner’s Guide

What Is the Price-to-Earnings (P/E) Ratio? Definition & Examples

What Is a Rate of Return?

Is the S&P 500 a Good Investment?

Let's Get Started

Ready to become a client?

Create an account with us in two minutes.

Or scan to get the app

We're building the best investment platform, ever

Titan Global Capital Management USA, Inc ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept our Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities. Past performance is no guarantee of future results. Any historical returns, expected returns [or probability projections] are hypothetical in nature and may not reflect actual future performance. Account holdings are for illustrative purposes only and are not investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Refer to Titan's Program Brochure for more information. Certain investments are not suitable for all investors. Before investing, consider your investment objectives and Titan’s fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. The introducing Broker Dealer is Titan Global Technologies LLC, a registered broker-dealer and member FINRA/SIPC. Brokerage services are provided to Titan Clients by Apex Clearing, an SEC registered broker-dealer and member FINRA/SIPC. For more information, see our disclosures. Contact: 508 LaGuardia Place NY, NY 10012. Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice. Check the background of these firms on FINRA's BrokerCheck.

© Copyright 2022 Titan Global Capital Management, Inc. All Rights Reserved.