You might have missed it, but yesterday, the US tech giant Netflix Inc (NASDAQ: NFLX) reported its quarterly earnings for the 3 months ending 31 March 2021.
It was quite a surprising result for a number of reasons. Firstly, despite its gargantuan US$225 billion market capitalisation, Netflix has long been priced as a growth company. Until yesterday's report, Netflix had boasted a price-to-earnings (P/E) ratio of over 90.
That's why it was a surprise to hear that Netflix had only added 4 million new subscribers over the quarter. Now that's still a massive number to be sure. But it pales against the 16 million the company added over the same quarter last year. In other words, we have a big slowdown here. What was even more surprising was Netflix's guidance for the quarter we are currently in (ending 30 June 2021). The company is only expecting to add another million subscribers. If that does come to pass it would be a 75% reduction on top of a 75% reduction.
Needless to say, the market reaction wasn't fantastic for Netflix shares. The Netflix share price dropped 7.4% last night in US trading.
But perhaps we shouldn't be surprised. The March quarter last year captured the most intense period of global COVID lockdowns. That is a near-impossible yardstick to compete with in 2021.
But it does sound a warning bell, which could extend to ASX tech shares.
Netflix: a warning for ASX tech shares
It's fair to say that the markets have been extremely accommodating and even generous to many ASX shares that could be classed as 'COVID winners' at various points over the past year or so. Think of Afterpay Ltd (ASX: APT), Zip Co Ltd (ASX: Z1P), Kogan.com Ltd (ASX: KGN) or Temple & Webster Group Ltd (ASX: TPW). All of these companies have seen a huge, if not volatile investor interest over the past year. This interest has pushed the share prices of these companies to levels that some investors have found inexplicable. Xero Limited (ASX: XRO) still has a P/E ratio over 600, after all.
Some ASX tech shares have managed to keep much of their COIVID-fuelled gains, like Afterpay and Xero. But others have given back some of their winnings, like Kogan and (to a lesser extent) Temple & Webster.
As it stands today, the S&P/ASX All Technology Index (ASX: XTX) is still at a relatively high point – at ~84% above where it was this time last year.
But perhaps with Netflix, the market is telling us that its leniency has limits. If the seemingly limitless growth runways start to shorten, Netflix's stock price gives us a good indication of what might be ahead.
Something to keep in mind for every ASX growth investor out there today.
