Netflix warns boom may not last after record growth last quarter

By: Bloomberg |

Published: April 22, 2020 6:21:21 pm

Netflix forecasts 7.5 million new subscribers in the second quarter. (Image: Bloomberg)

Netflix Inc. said the explosive growth in subscribers it posted last quarter — the strongest in its history — may not last beyond the stay-at-home orders.

Adding a record 15.8 million subscribers, Netflix benefited in the first quarter from an unprecedented health crisis, the global coronavirus pandemic. With billions of people stuck at home, the world’s largest paid online TV network experienced an explosive jump in customers in March, with many binge-watching “Tiger King” and “Love Is Blind” to ride out the quarantine.

But there’s no telling how long the boom will last. Netflix expects the surge to come at the expense of growth in the months ahead. “Our guess is subscribers will be light” in the third and fourth quarter, Chief Executive Officer Reed Hastings said Tuesday on a call with investors.

Netflix forecasts 7.5 million new subscribers in the second quarter — a great quarter under normal circumstances. But investors, who sent the stock to new highs this week, may have wanted more. Though they initially bid Netflix shares up as much as 12% after the close Tuesday, the rally soon fizzled. The stock was down 0.7% as of 7:34 a.m. Wednesday in New York.

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“Like other home-entertainment services, we’re seeing temporarily higher viewing and increased membership growth,” the company said in a letter to investors. “We expect viewing to decline and membership growth to decelerate as home confinement ends.”

While Covid-19 has been devastating to the global economy, video-streaming services like Netflix and YouTube have found a captive audience. The new Disney+ service surpassed 50 million subscribers in just five months, a faster pace than predicted. Three new video services, Quibi, Peacock and HBO Max, arrive this quarter and hope to have similarly rapid starts.

Skeptics have said Netflix would lose customers to the new competition. But thus far, those fears have been unfounded.

“What we’re seeing is people are cutting linear TV and adding Disney+ on top of Netflix,” said Nick Grous, an analyst at Ark Investment Management LLC, which owns the shares.

What Bloomberg intelligence says

“Netflix’s tempered 2H view of delivering fewer subscriber gains is driven by uncertainty surrounding the coronavirus pandemic as well as headwinds from production delays that will create tough comparisons, given the release of hit shows in prior-year periods. Still, a 1Q subscriber blowout and solid 2Q guidance established the service as a safe haven, confirming our view that Covid-19 will mean longer-term tailwinds for the platform as it accelerates the shift of consumers to streaming and away from linear TV.” –Geetha Ranganathan, media analyst

The quarter’s results reflected two of Netflix’s strengths: breadth of programming and a global footprint.

Months after releasing Oscar-nominated movies such as “The Irishman” and “The Two Popes,” Netflix cracked the code on tabloid-style documentary TV. “Tiger King,” about big-cat zoo owners, was the biggest new hit series for Netflix in the U.S. since “Stranger Things,” according to Nielsen.

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Meanwhile, “Love Is Blind,” a reality dating show, drew 30 million viewers in its first four weeks, Netflix said. A newer dating show, “Too Hot to Handle,” has been one of the most popular shows on Netflix since its release last week.

Netflix also showed strong growth all around the world. Business in the U.S. and Canada picked up after a few sluggish quarters, with Netflix adding 2.31 million new customers in its biggest market. That was more than the prior three quarters combined. The company signed up nearly 7 million customers in Europe, the Middle East and Africa, the most of any region.

The coronavirus had another unintended benefit for Netflix: its first quarter of positive free cash flow since 2014. Netflix produced $162 million in the first three months of the year. While the company had already vowed to narrow its cash burn in 2020, a worldwide pause in TV and movie production lowered costs in the quarter and will continue to do so this year.

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Production shutdowns could turn into a headache for Netflix depending on how long they last. Subscribers are accustomed to a steady flow of new content, and some of its competitors, such as Walt Disney Co. and AT&T Inc.’s WarnerMedia, have big libraries they can use to entice viewers. But Chief Content Officer Ted Sarandos said Netflix has finished production on most of its new programs for 2020.

Prior to the earnings release, Netflix investors had sent the shares to record levels, making it especially hard for the company to sustain the rally — even with blockbuster numbers. The stock had climbed 34% through Tuesday’s close, compared with a 15% decline for the S&P 500.

“I understand the caution around the response to the stock,” Grous said, before adding, “But we’re not focused too much on quarter to quarter. We’re thinking about the long-term trend here, and that is explosive growth.”

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