Netflix shares plunge 23% after disappointing Q4 results

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Netflix, streaming content pioneer, posted its Q4 numbers on Thursday. The result and management commentary disappointed the market. The Netflix share price closed 22% lower on Friday at $397.50 per share.

Netflix results highlights

Number of subscribers - Netflix added 8.3 million subscribers in Q4, a rise of 3.9% sequentially. The total subscriber count now stands at 222 million. The subscriber count was less than the management projection of 8.5 million for Q4. 

For the Q1 of the new fiscal year (2022), the company has only projected the addition of 2.5 million subscribers. It is much lower than the previous Q1 numbers. In the previous five years, Netflix has reported subscribers as below 4 million in 2021, 15.8 million in 2020, 9.6 million in 2019, 8.3 million in 2018, and 5.3 million in 2017.

Revenue in line with estimates - The company announced earnings per share of $1.33 at a revenue of $7.71 billion. The analysts' have earlier anticipated EPS of 84 cents on revenue of $7.71% billion.

Free cash flow - Free cash flow for the quarter was -$569 million versus -$284 million in Q420. The company said, however, is expected to be free cash flow positive for the full year 2022 and beyond.

Margins - The company reported a Gross Margin of 32% and an operating margin of 8.2%. It was the lowest in the past 12 quarters.

Netflix Q4 earnings: What caused the fall in price?

The main reason for the fall in Netflix's share price  was the company's projections of dismal paid net adds of 2.5 million, which is the second-lowest of the past 20 quarters. Normally, one-quarter of unimpressive performance should not be a problem. However, the timing of this is a concern for investors. It comes at a time when investors were already questioning Netflix’s growth model following 

  • the pandemic-driven spike in demand for streaming services in 2020 
  • the recent increase in membership price that, it turns out, may put a damper on demand

Netflix stock outlook: Brokerage radar

KeyBanc Capital Markets has lowered their rating on the stock from “Overweight” to “Equal-weight” following Thursday’s earnings release. Despite an improved content slate, the company still experienced challenges to its gross additional subscribers, noted the analysts.

Piper Sandler has retained an overweight rating on the stock while cutting its target price from $705 to $562. “The other regions we think look nascent and likely to return worldwide net adds to the 20MM+ annual growth range. It remains early in the transition away from linear TV and opportunities like gaming and merchandising have yet to take hold,” Piper Sandler wrote in a note to investors.