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Netflix Benefits from the Lockdowns – For Now

Posted on Thursday, Apr 23rd 2020

While the Covid-19 lock downs have hurt the global economy significantly, there are certain industries that are seeing strong growth. One surprising beneficiary is streaming service provider Netflix (Nasdaq: NFLX) that delivered a record quarter recently.

Netflix’s Financials

Netflix’s Q1 revenues grew 28% over the year to $5.77 billion, ahead of the Street’s forecast of $5.76 billion. It ended the quarter with earnings of $1.57 per share, which missed the analyst estimates of $1.65, but were 107% higher than previous year’s performance.

The biggest surprise, though, was the subscriber addition. Netflix saw its global streaming subscriptions grow 23% over the year to 182.86 million, and it added 15.77 million paid users for the quarter. The company had originally forecast an addition of 7 million subscribers for the quarter.

For the second quarter, Netflix forecast earnings of $1.81 per share on revenue of $6.05 billion. It expects to grow to 190.36 million global subscribers by the end of the current quarter. The market was looking for EPS of $1.54. The current uncertain conditions make it very difficult to forecast the quarter for Netflix. As lockdown restrictions ease, subscriber growth may slow down. Additionally, global recessionary conditions may hurt spending on Netflix as well.

Netflix itself believes that the virus has probably accelerated its subscription growth rate for the year, but does not expect similar growth rates to continue for the rest of the year. The strengthening dollar will also hurt its international revenues for the current year.

Netflix’s Content Slowdown

Netflix may have benefited from the current situation by adding subscribers to its portfolio. But in the coming months, original content will become a challenge. During the last quarter, with shelter-in-place orders coming into regions like Los Angeles, Netflix had to move a lot of its projects to work-from-home models. It has been able to transition animation production teams and series writers’ rooms to operate virtually, but several other projects have been affected. Due to various domestic and international government lockdowns, Netflix has already paused most of its production across the world. It has been unable to create dubs in Italian and some other languages due to home confinement of its voice talent for titles launching in April and May.

With uncertainty still looming on easing of restrictions, Netflix is not sure when it will be able to safely restart physical production in various countries. It is expecting original content releases to be pushed out and will need to rely on additional licensed films and series.

Meanwhile, Netflix is trying to improve its user experience as well. Earlier this year, it rolled out the Top 10 most popular lists to nearly 100 countries, after testing the feature in UK and Mexico last year. The listing provides users with access to three daily lists – Top 10 Overall, Top 10 Series, and Top 10 Films – to help viewers with content discovery.

Recently, it also enhanced its parental controls to improve the experience for family members of all ages. These upgrades include PIN-controlled access to content by maturity level, the ability to PIN protect specific titles and profiles, Profile-level content filtering and the ability to create customized experiences for kids of different ages. Keeping the social distancing norms in mind, Netflix also released Netflix Party – a virtual interactive approach to watching content with others.

For now, the market is pleased with Netflix’s performance. Its stock is trading at $437.49 with a market capitalization of $190.4 billion. It had climbed to a 52-week high of $449.52 earlier this month. The stock hit a 52-week low of $252.28 in September last year.

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