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Netflix Is Down but Not Out After a Disappointing Q4 Earnings Report

Netflix (NASDAQ: NFLX) shareholders can at least be thankful that the rout the stock suffered Friday morning after it released its fourth-quarter earnings report didn't get any worse. At the close of trading, the streamer's shares were down by 21.8%, a slight improvement over the 25% plunge they suffered at the opening of the session.

Yet there's not much reason to believe the share price will bounce back by much more than that in the weeks to come. Not only did Netflix fall short of expectations on new subscriber additions, but management forecast the company won't be adding many more in the first quarter either.

Image source: Getty Images.

Slow going from here

There was a lot to be disappointed about in Netflix's quarterly report. It added 8.3 million net subscribers in Q4 -- below the 8.5 million it had forecast. It anticipates it will add only 2.5 million in the current quarter -- less than half of what analysts had anticipated. And its profits tumbled by 34% from the year-ago period.

Yet it's possible the market is overreacting. Netflix is not contracting, despite the wider array of streaming media choices now available to consumers. It now has 222 million subscribers, and it was able to impose a price increase on them without much trouble. The additional revenue from that will also help Netflix finance more of the original content it has been producing in such quantity, including some titles which are now among the most-watched shows in the company's history.

Benchmark Group analyst Matthew Harrigan -- a longtime Netflix bear -- actually believes Friday's sell-off was overwrought. In a note to investors, Harrigan said he expects Netflix's earnings to exceed those of the S&P 500 by a wide margin.

Barron's quotes him as writing, "This allows Netflix growth to normalize relative to the broad economy, although we assume that Netflix is growing 30% faster than the broad global economy even exiting 2033."

New markets to test

It's been apparent for some time that North America is a mature market for streamers, and would present much slower growth opportunities than it used to for Netflix. That certainly played out this quarter. It's one reason why Netflix boosted subscription prices domestically -- because it can gain more revenue through fee hikes than from adding new members.

International markets are where it is experiencing the greatest growth: Netflix added over 7 million new subscribers in Europe, the Middle East, and Africa, as well as in the Asia Pacific market, in Q4.

While its performance in India has been a particular disappointment, according to CEO Reed Hastings, in countries like Japan and South Korea -- where its hit series Squid Game was developed -- it has been far more successful.

Netflix stock will likely remain at depressed levels as the market digests the numbers, but that's not all bad: Investors are now able to buy the streaming service stock at around the same price it traded at before the pandemic surge began.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Netflix. The Motley Fool has a disclosure policy.


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