Netflix’s dismal results are more evidence that the pandemic trade is over

After you pull growth forward, the afterparty is more like a hangover

TechCrunch got its teeth into the pandemic trade and its possible conclusion yesterday. As a refresher: After the initial onset of COVID-19 and the ensuing lockdowns, changes to work environments and restriction of travel, some companies saw their values quickly appreciate as they found investor favor.

The reasons for some sectors gaining luster in the eyes of the investing class were manifold, but can be condensed. Companies and sectors that saw demand accelerated by the pandemic saw their share prices similarly improve. And software companies, which showed resilience thanks to customers not being able to operate without paying for their offerings, quickly appreciated, pushing their valuations higher and higher.

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Until the trade ended. Software companies began to shed their pandemic valuation gains in the final weeks of 2021 and have continued to do so in the new year. For companies like Peloton, which rode a consumer demand shift that gave their products more shine, the trade is coming apart a little bit later.

Netflix is the latest company to suffer. Recent earnings results were just short of a catastrophe for the U.S. streaming company. Its shares are off around 22% this morning, bringing its value down to around $174 billion from a peak of more than $300 billion set last November.

As a pandemic trade, Netflix was an obvious contender; it provides inexpensive at-home entertainment. And when everyone stayed home, well, Netflix did quite well.

But that accelerated period of growth has ended. Netflix’s latest earnings report shows that instead of the company enjoying an expanded total market for its services that earlier, faster growth might have hinted at, it may have instead taken future growth and moved it up, leaving the popular video service now in low-growth quicksand, with investor expectations above what it can deliver.

Today, we’re exploring whether international growth can replace lost domestic growth at the company, and what could be ahead for firms like Netflix that find themselves coming down from a period of elevated investor attention and consumer demand. Netflix is an example, but what the company is going through could be an indicator of what’s ahead for other consumer services that had a strong period of growth amid the pandemic. Who else is in danger?

Understanding Netflix’s results

Netflix gained 8.3 million new paid subscriptions in Q4 2021, finishing the year with 222 million paid memberships. That doesn’t sound bad out of context, but context matters. First, the company projection was 8.5 million, not 8.3 – and markets are never fond of missed forecasts. Second, the 222 million figure means this was its lowest year of subscriber growth since 2015.

Taking a step back, this isn’t so much about missing the mark as it is about trust in numbers. Is Netflix capable of interpreting its situation correctly? And of forecasting accurately? Needing to address this may also explain why the company is more conservative in its Q1 2022 forecast. For the current quarter, it only expects 2.5 million new paid subscriptions, compared to 4 million in Q1 2021 – when, by the way, it expected 6 million.

But even if the company is adjusting its guidance, it still leaves questions about what is going on. For instance, media experts may wonder if the company is affected by increased competition or merely reaching saturation levels. Netflix dismisses the importance of these concerns, and we tend to agree. It isn’t necessarily good news, though.