Netflix's downbeat earnings explained

Netflix reported better-than-expected earnings. So why did share prices fall nearly 10% after the report?

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix (NASDAQ: NFLX) share prices fell roughly 10% after the company reported first-quarter earnings last week. The global streaming content provider reported revenue in line with expectations and earnings per share above what analysts on Wall Street were predicting.

So why did shares of Netflix fall 10% after the results were made public? 

Slowing subscriber additions

One obvious reason for the drop was Netflix had guided investors that it would add 6 million new subscribers in the quarter. When it was all said and done, it only added 4 million. Subscribers are what fuel Netflix's business. Almost all of the company's $7.16 billion in revenue last quarter came from subscriptions.

To make matters worse, Netflix is forecasting it will add only 1 million new members in the second quarter. If it happens as forecast, that will be the lowest quarterly gain since 2016. Management explains that the reason for the slowdown in member growth is the significant pace of signups during 2020. As people anticipated being cooped up in their homes during the pandemic, they signed on to Netflix by the millions.

Management does make a valid point -- 36 million people signed up for Netflix in 2020. Still, it wasn't enough to assuage worried investors.

There is also worry that increasing competition in the streaming wars might make it difficult for Netflix to continue growing. Walt Disney's (NYSE: DIS) streaming services are mounting a formidable challenge with over 150 million subscribers across its three main services (Disney+, Hulu, ESPN+).

There has always been volatility in membership growth for Netflix. What's changed over the last few quarters are the significant challenges posed by competitors. Whereas previously investors may have attributed lower subscriber growth at Netflix to variance, they may now attribute a slowdown to competition.  

What it could mean for investors 

Given the heightened importance of competition, shareholders should expect higher volatility in the stock price following these quarterly announcements of membership totals. If you're a long-term believer in Netflix, that can work to your advantage. While volatility is generally associated with risk, stocks with higher risk can produce higher returns than a lower-risk counterpart. Besides, Netflix is also reporting lower subscriber churn and it continues to prove itself as a content producer. The seven Oscars it won this year were the most among all the film studios. Competition might slow it down, but it's not going out of business anytime soon. 

That volatility can also create share price pullbacks that can be a buying opportunity for those with a long-term mindset and willingness to withstand so fluctuation along the way. Despite the recent slowdown in subscriber growth, Netflix is hitting a stride in performance. Overall revenue is nearly triple what it was in 2016. And earnings per share are up an incredible 14 times what they were in 2016.

Moreover, even though you would be getting a business that's in much better shape, you can now buy Netflix at a forward price-to-earnings ratio near the same level it was before the onset of the pandemic (47.8). 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Parkev Tatevosian owns shares of Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Netflix and Walt Disney. The Motley Fool Australia has recommended Netflix and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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