Should I invest in Netflix (NFLX) stock after disappointing subscriber adds and guidance?

By: Michael Harris
Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to… read more.
on Apr 21, 2021
  • Netflix stock fell sharply today after adding only 3.98 million global paid net subscribers in Q1, vs 6.2 est
  • The company blamed weak Q1 performance on COVID-driven issues with producing new content
  • Analysts are still bullish as NFLX is well-positioned to outperform in 2021 amid an accelerated digital shift

Shares of Netflix (NASDAQ: NFLX) are trading over 7% lower in today’s trading session after the company reported lower-than-expected earnings for its first quarter.

What happened?

Netflix stock fell sharply today after the streaming company said it added 3.98 million global paid net subscribers. This figure represents a sharp contraction from the company’s target of 6 million new additions, as well as the 6.2 million new subscribers the analysts were expecting.

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On a more positive note, the company reported earnings per share (EPS) of $3.75 per share to easily beat the $2.97 consensus. Sales were reported at $7.16 billion, slightly higher than the $7.13 billion expected. 

Netflix now has 208 million paid members to record an increase of 14% compared to a year ago, but still lower than the company’s Q1 target of 210 million paid subscribers. For the current quarter, Netflix said it only projects to add 1 million subscribers.

“We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays,” the streaming company said in a statement. 

Is it now a good time to buy Netflix stock?

Despite lower-than-expected subscribers additions for Q1, it is likely that Netflix will bounce back in the second half of the year. The company is expecting to ramp up content production efforts later this year, which is likely to attract new paid subscribers. 

“We continue to anticipate a strong second half with the return of new seasons of some of our biggest hits and an exciting film lineup. In the short-term, there is some uncertainty from Covid-19; in the long-term, the rise of streaming to replace linear TV around the world is the clear trend in entertainment.”

Market analysts are still bullish on Netflix with Morgan Stanley equity analyst Benjamin Swinburne saying that the slowdown is a result of the pandemic-driven pull forward in demand, as well as production delays. Hence, the company’s business model is still working and likely to yield more capital return in 2021. 

The COVID-19 pandemic has accelerated the digital shift and transformation from cinemas to streaming platforms, where Netflix dominates. As such, shares of Netflix are still attractive as they are likely to soar higher before the end of 2021 on the expected rebound in new subscribers addition. 

NFLX weekly chart (TradingView)

Technically, Netflix stock price has rebounded off the wedge support near the $500 handle to offer traders looking to buy Netflix shares a chance to get on the long side. A break below this mark would yield a deeper correction with long-term investors potentially interest to buy shares at $425, where the old record high is located.

Summary

Netflix reported weaker-than-expected subscribers additions for its first quarter and lower Q2 guidance. Still, analysts are bullish that Netflix stock is well-positioned to outperform in 2021.

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