Netflix outpaced its own gloomy quarterly forecasts, stemming subscriber losses and posting higher revenue despite a more competitive streaming landscape and challenging economic environment.
Shares surged 5.6 percent ahead of Tuesday’s release, closing at $201.63, amid a broad rally that sent the Dow Jones industrial average up more than 750 points, or 2.2 percent. The broader S&P 500 index and tech-heavy Nasdaq ended even higher, up 2.8 percent and 3.1 percent, respectively, as investors appeared buoyed by better-than-expected quarterly earnings that showed businesses were managing withering inflation and despite recession fears.
“Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content, and marketing as we’ve done for the last 25 years, and to better monetize our big audience,” Netflix said in the report.
Netflix generated nearly $8 billion in revenue, an 8.6 percent increase over the same period last year, although the rate of growth is slowing and the company projects it to continue to ease. Netflix expects a gain of 1 million paid subscribers next quarter.
The company attributed its slowing revenue growth to a range of issues, including higher adoption rates of connected TVs, more streaming competition, account sharing and broader factors like sluggish economic growth and the war in Ukraine.
To beef up sales, the company said it will focus on evolving and improving its revenue lines, including a widely anticipated ad-based subscription plan and clamping down on free password sharing.
Netflix will introduce its ad-supported tier in a handful of markets first, the company said, in places where spending on advertising is already significant.
“Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners,” the company said.
Last week, the company announced that Microsoft, which doesn’t have a streaming service of its own, would serve as Netflix’s global advertising technology and sales partner.
In addition to considering lower-cost plans, Netflix is also trying to wring money out of the 100 million households that share passwords and access the service without paying. The company is expanding efforts to charge subscribers an extra fee to view content from outside their primary residence. The company said its goal is to release a paid sharing offering in 2023.
The financial results come at a challenging time for the company. Netflix is beset with its own struggles in producing troves of content while Wall Street had punished the technology sector at large this year. The Nasdaq has slumped 25 percent in 2022 as tech stocks give back the staggering gains they saw in the initial phase of the coronavirus crisis.
Netflix shed 200,000 subscribers in the first quarter, its first decline of paying customers in more than a decade. Worse, the company projected steeper losses to come. For a tech giant whose story was fueled by subscriber growth and was a member of the elite FAANG stocks — the others are Facebook (now Meta), Amazon, Apple and Google (now Alphabet) — a shrinking user base can spell doom. Shares fell by more than a third in April, during the last earnings report. Despite the winning day, the company is down by 66 percent for the year.
“The world shifted under their feet,” said Andrew Rosen, founder of the streaming newsletter PARQOR, which is published on The Information. Like other economic trends accelerated by the pandemic, Netflix enjoyed a spike in demand as consumers were forced to spend more time at home, compressing what might have been years of growth into a matter of months. The unsustainable climb also was met with production issues stemming from the virus, Rosen said. “Their story before then was growth. And now that story’s gone,” he said.
Meanwhile a host of competitors are vying for attention and streaming dollars. Disney Plus, Prime Video, HBO Max and Paramount Plus helped transform the streaming world, leaving consumers to manage multiple subscriptions if they want to watch hit television shows scattered across services.
“They are losing subscribers in the US and Europe because of competition, recession, inflation, and general fears about the economy.” said Michael Pachter, an analyst for Wedbush Securities. He said that Netflix will continue to grow as people cut the cable cord and as they offer a cheaper ad-supported option. “The important thing is for them to adjust spending in a low-growth environment,” he said.
Eighty-five percent of U.S. households subscribe to at least one streaming service, according to Kantar Group, a data analytics company, with the average home subscribing to nearly five. Americans streamed nearly 15 million years’ worth of content last year, according to the research firm Nielsen.
The war in Ukraine also has eaten into the company’s viewership, underscoring the far-reaching ramifications of the geopolitical conflict and the company’s global reach. The streaming service lost 700,000 subscribers when it pulled out of Russia following the Ukraine invasion, joining much of corporate America in attempting to isolate Moscow. But that drop-off coincides with broader viewership declines as pandemic social restrictions recede and consumers increasingly seek out entertainment away from home.
The nation’s economic climate has also worsened. Consumers face record-high inflation while the Federal Reserve pursues an aggressive monetary policy intended to tamp down on price increases and cool the economy. But the efforts also carry the risk of sparking a recession. As consumers adjust their spending to account for more expensive housing, fuel and grocery costs, canceling subscription services could become a budget-tightening measure of first resort.
But the streamer is also chasing new lines of revenue and new audiences. Following its announcement last summer that the company intended to explore the market for video games, Netflix has hired multiple executives to significant positions in its gaming division in recent months. It has also releasing mobile games like “Stranger Things: 1984.”