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Netflix subscriber growth slows, stock drops

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Yahoo Finance's Julie Hyman and Brian Sozzi discuss Netflix's stock taking a dip, subscriber growth, the company's fourth quarter earnings, and the outlook for the streaming platform.

Video transcript

JULIE HYMAN: We have to start by digging into Netflix and those disappointing numbers from the company on a number of different fronts here. Now with Netflix, of course, subscribers are always what tend to get the most attention. So let's run through those numbers quickly here.

Fourth quarter subscribers up 8.3 million. That misses the company's own prior guide of 8.5 million. Also the company saying, in this current quarter, it's going to grow subscribers by 2.5 million. That's versus growth of 4 million a year earlier. So pretty dramatic slowdown in that first quarter growth rate here. Also getting some attention, operating margin at 8.2% versus 14.4% a year earlier. That's the fourth quarter number there as the company spent more money on content.

And Brian Sozzi, some of the spending on content paid off. I mean, Netflix had some really big hits during the quarter and over the course of the year between "Squid Game," "Don't Look Up," also getting really big numbers. But it seems like it wasn't enough, particularly when you look across the globe.

BRIAN SOZZI: No, and it really wasn't enough for Wall Street. As you're seeing with the stock reaction here in the pre-market, Julie, absolutely vicious. I counted at least four downgrades by sell sign analysts this morning on Netflix after this quarter. Makes you wonder where the hell were they last week into this report. Nonetheless, there was a lot of concern here.

And there's a lot of concerning takeaways, I think, from the earnings call. When you have Reed Hastings, the co-chief executive officer of Netflix, hopping on this very lengthy earnings call, saying that, hey, we're being impacted by increased competition. We're being impacted by, what he is calling, a COVID hangover effect and, oh yeah, we really can't measure the impact of any of this stuff and when it might end, those are red flags.

And I think that's why you see the likes of Pivotal Research-- and I just wrote about this, the story's on the Yahoo Finance Homepage right now-- why you have analysts calling Netflix shares dead money, potentially dead money right now, even after this very sharp pullback.

JULIE HYMAN: Well, I'm curious because I didn't get a chance to take a look at that note size. Does Pivotal say it's dead money for how long? I mean, typically you'll get an analyst make a comment like that and say, you know, this is a period that's going to last X amount of time. Did they put a time frame on it?

BRIAN SOZZI: Short term. It's one of those short term tactical calls, I think, out of Pivotal where it's going to be hard to drive a bullish case around Netflix in the near term after a quarter like this, and after a quarter where they came out and really warned of even slower growth in the first quarter here.

So a lot to be concerned about. But again, Pivotal coming out saying a little bit more optimistic longer term, still view the business model as intact. And that model, essentially, is people leaving pay-tv and signing up for streaming services. But again, just not a good conference call from Reed Hastings and company.

JULIE HYMAN: Yeah. At the same time, Hastings did express confidence in the longer term for the company also. Right? That, yes, there is competition here, but that company is going to manage to hold up. A couple of other things that we have to mention, of course, the raised prices. Right?

Netflix raising prices in the US and Canada last week, which was the first increase since 2020. And in the investor letter, holding out the idea and the possibility of continued price increases. In particular, a couple of things that are increasing costs for Netflix.

One of them is content. That's nothing new. Right? The company has been spending on content. But secondly, currency effects as well, which it said hit numbers last year as we've seen a strengthening dollar and as Netflix gets more and more of its revenue from overseas. So that then is worth less to it when it brings it back here to the US. So that's something also that's affecting the company that I think bares watching as well.

BRIAN SOZZI: What also bares watching too, and that is, a broader earnings season trend too, as well, Julie. I'm glad you highlighted that $1 billion here from the stronger dollar. It's not just Netflix. It's something we're going to be hearing about, I think, at length over the next few weeks as these multinationals report.

But you have to wonder, on a week that started with Microsoft paying nearly $70 billion to buy Activision Blizzard, at what point does a Netflix come out here and make some form of acquisition to jump start its growth? Because they're essentially telling you, in the US, their business may be near a peak. And it may be hard to get new subscribers in the US.

So as an investor, you're starting to think, well, what could drive future growth for Netflix? Sure, you know, there's an international component here. But if this company wants to be a big player in games, also live sports and news, something that Hastings talked about and acknowledged that they're not really in right now. At what point do you open up your pocketbook and spend up big just to help to build out this portfolio for Netflix?

JULIE HYMAN: Yeah, well, the company did introduce mobile gaming during the quarter which is interesting. We're not getting a lot of detail as to what significance that has now or how big it could be. Something else they also introduced, a site-- and I don't know how to say this thing-- T-U-D-U-M? Tudum? Tudum? Tudum, Tudum, Tudum.

I don't know what it's supposed to be pronounced like. But it's a site that they say extends stories and conversation. And it's sort of a fan site for the shows, I guess, to sort of interact and increase engagement. That's going to be something I'm going to be watching. It's quite interesting.

Just to put today's stock move in perspective, by the way. It is not unusual for Netflix to have big moves following earnings. Right? The average move in the stock over the past five years following earnings has been 10%. And in some cases, it's been larger than that. To get a drop like this, though, you've got to go back to 2012. And that was when Netflix was quite a different company and in a different place in its maturity level.

But again, to put things in perspective, it went public back in May 2002. You want to take a guess as to how much the shares are up since it went public?

BRIAN SOZZI: No. I don't want to sound dumb. Take it away, Julie.

JULIE HYMAN: 47,000%. So I guess that puts things in perspective, a little bit. OK.

BRIAN SOZZI: You know, Julie, I want to add, too, I think, real quickly, you know, we have a lot of new investors on the Yahoo Finance platform still, a lot of people coming into this market. And this is another learning lesson, I think, for them. You know, shares of Netflix were down about 17% into this report. You saw a lot of analysts on the Street lower their earnings estimates into this quarter because of a lot of concerns.

There's a reason, many times, why a stock declines by double digits into an earnings report. And I understand there's been a broad tech market sell off. But still, there's a fundamental aspect here that I think helps to drive Netflix shares down into this report. And we saw it play out in the quarter.

JULIE HYMAN: On the flip side, if people bought shares going into the report, and they can hold on through today and through the next year, they might end up being rewarded. I don't know. Too soon to tell.

BRIAN SOZZI: Got a prediction?

JULIE HYMAN: You know I don't make predictions.

BRIAN SOZZI: I know.

JULIE HYMAN: That's why I said might, Soz. I don't speak in absolutes, except when I'm talking about food, maybe.

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