Netflix’s subscriber loss is a 'body blow to the bull case'

Make no mistake: The drop in Netflix’s (NFLX) subscriber count is a major setback for the company, Manhattan Venture Partners Head of Research Santosh Rao told Yahoo Finance (video above).

“This is a body blow to the bull case — definitely to the Netflix story, the subscriber story,” said Rao. “Netflix was all about subscribers for so long… and it's really taking it on the chin here.”

Netflix’s stock tanked in response to its latest round of earnings, as shares dropped by more than 35% in after-hours trading on Wednesday. After withdrawing from Russia due to its invasion of Ukraine, Netflix lost about one million subscribers and clocked a net loss of 200,000 subscribers in the first quarter of 2022. The Internet’s abuzz with theories as to what could be behind the decline and what the company should do next, from too much subscriber churn to talk of Netflix’s exploration of an ad-supported subscription. But one thing is clear, said Rao — that it’s time for Wall Street to revamp its expectations.

“The whole story has to be re-evaluated from a lower base now,” he said. “The multiples are getting compelling at this point, but we need to see that the growth story is still intact and they have a strategy to tackle the challenges ahead.”

Despite the markets’ reaction to earnings, bright spots for Netflix could be on the horizon as it looks to adjust, given the release of much-awaited content like the latest seasons of “Stranger Things,” “Peaky Blinders,” and “The Umbrella Academy.” Wall Street’s also intrigued by the company’s newly-announced efforts to offer an ad-supported subscription, as well as its efforts to wrangle password-sharing. Raymond James analyst Andrew Marok especially views the possible ad-supported offering as a significant positive, he wrote in an April 20 note. He also added that the company has solid operating margins.

“Netflix recorded 1Q22 operating margins of 25.1% vs. guidance of 22.3%, driven by cost efficiencies,” wrote Marok.

Expansion, in more ways than one

As Netflix finds its way forward, the company’s going to need to expand both its content strategy and geographic reach, said Rao.

“They need to get into some other sticky things – like more gaming, maybe sports, advertising revenue, of course,” he said. “There are all these additional levers that they need to pull, because this is not working. The traditional core business may have peaked, especially in their core markets.”

There are many ways forward for Netflix, though perhaps the most important of them is international growth. India and Japan are key growth markets for Netflix, and there’s room to keep building out the platform’s footprint in EMEA, said Rao. Netflix agrees, per its shareholder letter, which delineated the ways the company is setting itself up to thrive internationally.

“To support this, we’ve been building out capabilities like creative development, personalization, and language presentation/localization,” the company said in its shareholder letter. “Netflix is now producing films and TV in more than 50 countries with a high degree of integration in the local entertainment ecosystem resulting in the creation of blockbusters from every region. In fact, three out of our six most popular TV seasons of all time are non-English language titles: Squid Game, La Casa de Papel Part 4 and All Of Us Are Dead.”

It’s imperative that Netflix approaches these markets with a “more localized strategy” and competitive pricing, added Rao.

Allie Garfinkle is a senior tech reporter at Yahoo Finance. Find her on twitter @agarfinks.

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