How Serious Is The COVID Hangover?

During Thursday’s Netflix
NFLX
earnings call, listeners heard a familiar refrain. The streamer’s subscribers remain on the rise, but they’re no longer spiking. And it once again failed to meet Wall Street’s growth expectations.

The company said it had finished slightly under its subscriber estimate during fourth quarter 2021, gaining 8.3 million subscribers vs. a projected 8.5 million. It also said first-quarter growth is on pace for 2.5 million, down from 4 million a year ago.

“While retention and engagement remain healthy, acquisition growth has not yet re-accelerated to pre-Covid levels,” the company noted in its letter to shareholders Thursday.

Let’s put this in movie terms: The sky isn’t quite falling for Netflix, which is coming off a number of programming successes in 2021, including Squid Game and its two most-watched movies ever, Red Notice and Don’t Look Up.

But the streamer isn’t putting up blockbuster numbers; it can’t seem to find a comfortable footing in the post-lockdown era. Following gangbusters growth in 2020, when so many people were trapped in their homes to avoid the spread of COVID-19 and looking for something to do, Netflix has entered an uneven period of growth.

It is still growing, but it’s growing more slowly it did a year ago. And that apparently has discouraged investors. Netflix stock plunged 20% in after-hours trading Thursday.

This is hardly a dire situation. Many of its numbers remain rosy. In the letter to shareholders, the company also noted, “Revenue in Q4’21 grew 16% year over year with a 9% increase in average paid memberships.”

The slower subscriber growth reflects, the company argued, some of its premier TV series and movies slated for later in the year. “Our guidance reflects a more back-end weighted content slate in Q1’22 (for example, Bridgerton S2 and our new original film The Adam Project will both be launching in March),” the shareholder letter noted.

But while Netflix had plenty to glow about in that letter, the service does face concerns reflected in other data. An Entertainment on Demand Q4 streaming analysis from Kantar, a data, insights and consulting company, found that overall streaming penetration saw growth in the U.S. during the same period that Netflix’s expansion slowed. Streaming penetration rose 2.7%, and 9% of households took out a new streaming subscription, up from 8% in third quarter.

Netflix was the only platform to lose penetration quarter over quarter, according to Kantar, down to 54.3% from 54.6% in third quarter. It’s a minuscule difference, but it’s telling. The takeaway? Competition from other platforms may be taking a bigger toll than Netflix wants to admit. That plus the greater return to normalcy even as COVID numbers remain high may have put the biggest damper on Netflix’s surge.  

And it comes after up-and-down results earlier in 2021. In second quarter, Netflix recorded its lowest subscriber growth in at least four years. It rebounded a bit in third quarter with 4.4 million new subscribers, tripling second quarter’s numbers.

Perhaps another blockbuster is on the way, though. Netflix co-CEO and chief content officer Ted Sarandos confirmed during the earnings report that there will be a second season of Squid, the streamer’s all-time biggest show.