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Earnings Results: Netflix eyes ad-supported tier and targets password-sharing as subscriber total shrinks, stock plunges

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After the worst quarter for Netflix Inc. stock in nearly a decade, the streaming-video pioneer disclosed that it lost subscribers for the first time on record Tuesday and expects the same to happen this quarter on a wider scale, sending the stock plunging again in extended trading.

Netflix
NFLX,
+3.18%

reported a net loss of 200,000 paid subscribers in the first quarter, while analysts on average were forecasting 2.5 million net additions, according to FactSet, which was what Netflix executives had forecast. The decline arrived after a price increase in the U.S. and Canada, and executives guided Tuesday for a loss of 2 million subscribers in the current quarter, while analysts were expecting net adds of 2.55 million.

Shares plunged nearly 20% in after-hours trading immediately following the release of the results, after closing with a 3.2% increase at $348.61.

Netflix reported earnings of $1.6 billion, or $3.53 a share, down from $3.75 a share a year ago, when Netflix first revealed its expectations for a severe pullback in new additions after a pandemic-fueled surge in 2020. Netflix revenue improved to $7.87 billion in the quarter from $7.16 billion in the same period a year ago, but missed diminished expectations.

Analysts polled by FactSet expected earnings of $2.90 a share on sales of $7.93 billion, estimates that had also fallen in recent weeks.

The subscriber forecast was not the only forecast miss. In a letter to shareholders, Netflix executives said they expect revenue to grow to $8.05 billion from $7.34 billion in the second quarter a year ago, coming up short of analysts’ average estimate of $8.22 billion, though their profit estimate was in line with estimates.

“Our revenue growth has slowed considerably as our results and forecast below show,” Netflix executives said in a letter to shareholders announcing the results. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds.”

Netflix stock declined 37.8% in the first quarter, the worst performance for the stock since it was still being pummeled by the “Qwikster” debacle in 2012. Most of the decline occurred after a disappointing subscription forecast three months ago that wiped out $49.1 billion in market capitalization, though a loss to Apple Inc.
AAPL,
+1.41%

in the Best Picture category at the Academy Awards in March also hurt. Apple TV+’s “Coda” beat out Netflix’s “The Power of the Dog.”

Read more: After its own Oscars slap and Wall Street smackdown, Netflix searches for a rebound

The cascade of disappointing news has punished Netflix shares as much as any company. The company’s stock has collapsed 42% so far this, while the broader S&P 500 index
SPX,
+1.61%

has edged down 7% in 2022.

Read more: After its own Oscars slap and Wall Street smackdown, Netflix searches for a rebound

Netflix’s subscription slowdown after a pandemic surge has only intensified pressure from rival streaming services at Apple, Walt Disney Co.
DIS,
+3.24%
,
Amazon.com Inc.
AMZN,
+3.49%
,
AT&T Inc.
T,
+0.21%
,
Comcast Corp.
CMCSA,
+2.67%

and Paramount Global
PARA,
+0.86%
.
Compounding matters, Netflix is emerging through a dry patch of programming after back-loaded slate of original movies like “Don’t Look Up” and “Red Notice” and series such as “The Witcher” to wrap up 2021. A major question moving forward is how many billions of dollars Netflix is willing to sink into content to keep pace with its rivals.

Access to original content (39%) and a broad array of content (38%) are the top two reasons U.S. consumers subscribe to steaming services, though the same consumers say they’re canceling paid SVOD services because of cost (41%), price increases (30%) and lack of new content (30%), according to Deloitte’s recent Digital Media Trends Survey.

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