MarketWatch First Take: There is a new normal for Netflix, and that is not necessarily a bad thing


Netflix Inc. investors need to change how they evaluate the streaming-media giant.


has long been judged by growth in streaming subscribers, so when earnings arrived Tuesday with the worst first quarter for net additions since 2013 and a forecast for the worst quarter in Netflix’s history by that standard, the stock got pounded.

However, that single fact obscured the view of the streaming service’s best quarter yet from a financial point of view. Netflix reported stunning net income of $1.71 billion, a quarterly record that was almost $1 billion higher than the $709 million reported a year ago and nearly as much as Netflix earned in all of 2019. Revenue increased more than 24% as price increases in the U.S. and Canada took effect.

The ongoing COVID-19 pandemic accelerated many types of businesses that were easily adoptable while working from home and sheltering in place, pushing years of growth into a single year. Netflix said that growth expected in 2021 was compressed into 2020, and now it expects to see just 1 million new subscribers in the second quarter.

In the company’s analyst interview late Tuesday, Chief Financial Officer Spencer Neumann cited the coronavirus and 2020’s huge pull forward in terms of subscriber additions. “In terms of Q1 performance, it really boils down to COVID, frankly,” he said.

“We had those 10 years where we were growing smooth as silk, and it’s just a little wobbly right now,” founder and co-CEO Reed Hastings said.

Read more about how the tech earnings boom in the pandemic won’t last forever

Yet Netflix and investors are seeing the results of that 2020 growth on the balance sheet, with Netflix maturing into a company that makes a lot of money. It will even start to push some of that cash back to investors: The company is embarking on its first stock-buyback plan in nearly a decade, with $5 billion in repurchases set to begin.

Investors criticized Netflix’s hefty content spending and cash burn in recent years, instead focusing on subscriber growth and churn rates, putting less emphasis on net income and revenue growth. Now, investors need to turn that around — with new streaming competition from Walt Disney Co.
Apple Inc.

and others seeking to grow their subscriber bases, Netflix should focus more on retaining its customers and wringing more money out of them.

For more: Your streaming subscriptions reshaped Disney and turbocharged Netflix — now comes making more money off you

If that is the focus going forward, there are still some caution signs. The huge profit increase was helped by the company’s slowdown in content spending, as production was slow to ramp on many shows and films because of the ongoing pandemic. Netflix still expects to spend $17 billion on content this year, though, and is trying to avoid using debt to finance productions as it has done in recent years.

There is also a legitimate concern that the new arrivals on the streaming scene could eat into Netflix’s subscriber base.

“Of course we’re wondering, ‘wait a sec, are we sure it’s not competition?’ Because obviously there’s a lot of new competition,” Hastings said, adding that the company looked through a lot of data from all its markets to analyze the current landscape. “We just can’t see any difference in our relative growth in those regions. Which is what gives us confidence — that it’s intensely competitive, but it always has been. I mean, we’ve been competing with Amazon Prime for 13 years, with Hulu for 14 years.”

“Despite management’s remarks in regards to competition, it seems hard to believe that the slew of new online streaming services is not beginning to have some sort of effect,” Dan Morgan, a senior portfolio manager at Synovus Trust Company, wrote in a recent note to clients. “Netflix faces a more  competitive landscape into 2021.”

If the effects of competition lead to slowing growth in new subscribers, Netflix can handle that. Losing customers or even dramatic slowdowns in additions for longer periods would be a bigger concern. Netflix is now the old streaming giant, surrounded by younger upstarts on the scene, and one that faces the laws of large numbers.

Tuesday’s report is not a true reason to worry, rather it is a sign of a maturing company that is doing exactly what investors hoped for in recent years: Making a ton of money by being the first to the next generation of media consumption.

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