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Wednesday, April 22, 2021
Netflix's first quarter disappointment might be one of many
First quarter earnings out of Netflix (NFLX) published Tuesday night surprised investors.
Shares of the streaming giant sold off in response.
Netflix's business was hit in the first quarter by the twin pressures of an economic re-opening that enables people to do things other than watch Netflix while it also faces a shortfall in new content to drive sub growth as COVID hampered production schedules.
"The extraordinary events of Covid-19 led to unprecedented membership growth in 2020, as it pulled forward growth from 2021, and delayed production across every region," the company said in its shareholder letter.
"In turn, we ended 2020 with a bigger membership and revenue base than we would otherwise have had, contributing to record Q1’21 revenues... In Q1, paid net additions of 4m were below our 6m guidance (and the 16m net additions in the year ago quarter) primarily due to acquisition, as retention in Q1 was in line with our expectations. We don’t believe competitive intensity materially changed in the quarter or was a material factor in the variance as the over-forecast was across all of our regions."
Some of these are, to be sure, Netflix-specific challenges. And there are but a handful of companies that so specifically met the consumer challenge of boredom during the beginning of the pandemic and also faced such pointed challenges in bringing supply online during said pandemic.
But this quarter from Netflix does also serve as a warning to investors looking at names that have benefitted greatly from COVID tailwinds that negative surprises are lurking. Or as Twitter user ShortSighted Cap noted Wednesday: "There will be more Netflix-like prints."
Earlier this week, results out of Procter & Gamble (PG) highlighted the theme that strategists are on the lookout for — higher costs. Ahead of earnings season, we spent a lot of time in The Morning Brief writing about earnings estimates getting revised higher and trying to keep up with robust economic growth.
How investors square potential margin pressures against a macro backdrop that continues to surprise to the upside is the primary big picture question for investors this earnings period. And this question again brings to mind the idea that what's good for America could be a negative for financial markets.
But these are high level discussions.
On the individual company level, it is clear we're liable to see all kinds of strange results not only during this quarter but in the quarters ahead. We've already seen some companies comparing first quarter 2021 results to the same period in 2019, just skipping right over last year. And how investors judge one-offs versus sustainable growth trends is what the market must work out in real-time.
Netflix and, say, a company like Zoom (ZM) are but two easy examples of companies that saw growth pulled forward and will face tough comps in the coming quarter. And in these situations, investors may well be prepared for some of this bad news. But there are certainly many more business trajectories impacted by COVID-related changes than management teams and analysts might want to acknowledge.
Because while everyone agreed that everything changed in 2020, it is only now that we can start to see just how much — or how little — ended up creating a new long-term growth story. Or how much creates a new narrative challenge in the quarters ahead.
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