By most standards, Netflix had a strong fourth quarter and full-year 2021, but it wasn’t perfect and investors expressed their displeasure. After the streaming subscription service released it fourth quarter and full-year 2021 financials last week, Netflix stock dropped by just over 35% between January 20 and 21, 2022, going from $508.25 per share on Thursday to $397.50 per share on Friday. Though much of Netflix’s earnings report was positive, investors didn’t take kindly to the drop in margin, net income or earnings, and they didn’t seem to be overly impressed with the company’s first quarter paid membership forecast either.

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The streaming subscription service reported total revenue of $7.7 billion, representing growth of 16% year-over-year. Netflix reported total streaming paid memberships of 221.8 million, including 8.3 million paid net additions during the quarter. At the end of Netflix’s third quarter, the company had 213.6 million streaming paid memberships.

Operating margin, net income and earnings per share were both down for the quarter, however. Operating margin was 8.2% compared to 23.5% in the third quarter, and net income was $607 billion compared to $1.4 billion in the third quarter. Fourth-quarter earnings were $1.33 per diluted share, compared to third-quarter earnings of $3.19 per diluted share.

In its January 20, 2022 shareholder letter, Netflix said, “We achieved several milestones in 2021: we had the biggest TV of the year (Squid Game), and our biggest film releases of all time (Red Notice and Don’t Look Up) and Netflix was the most Emmy-winning and most nominated TV network and most Oscar-winning and nominated movie studio of 2021.”

Other highlights included:

• Average paid memberships increased 9% for the fourth quarter.
• Average revenue per membership increased 7% for the fourth quarter.
• The company’s full-year operating margin was 21% in 2021, compared to 18% in 2020, and above their 20% forecast.
• Paid net additions for the year were 18 million compared to 37 million in 2020.
• In November, Netflix debuted mobile games on Android and iOS, free to all Netflix subscribers. There are currently 10 games available on the service.
• The company also launched the Netflix Book Club during the fourth quarter.

Content

Many viewer surveys indicate that Netflix offers some of the best content, and it is one of the primary reasons they currently have the highest streaming market share. Netflix shared content highlights in their fourth-quarter shareholder letter, including:

• New seasons of The Witcher (484 million hours), You (468 million hours viewed), Emily in Paris (287 million hours viewed) and Maid (469 million hours) in first 28 days after release
• Squid Game, released late in the third quarter, generated 1.65 billion hours viewed in the first four weeks, Netflix’s biggest TV show ever.
• Red Notice, featuring Dwayne Johnson, Gal Gadot and Ryan Reynolds, was the most popular movie launch of all-time with 364 million hours in the first four weeks.
• Don’t Look Up, featuring Leonardo DiCaprio, Jennifer Lawrence, Rob Morgan, Johan Hill, Timothee Chalamet, Tyler Perry and Meryl Streep, was the platform’s second most popular film of all time with 353 million hours viewed.
• Other popular films released during the quarter included The Unforgivable (215 million hours), Army of the Dead (158 million hours), Love Hard (134 million hours)

Pricing

In its shareholder letter, Netflix noted that it lowered prices in India across all four plans. However, Netflix failed to mention the price increase it is currently implementing in the U.S. and Canada. For new subscribers, Netflix plans are increasing $1 to $2 per month immediately. Existing subscribers will receive email notification before their monthly pricing increases.

Competition

In each of its shareholder letters, Netflix addresses competition.

“Consumers have always had many choices when it comes to their entertainment time – competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering. While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched,” Netflix wrote.

“This reinforces our view that the greatest opportunity in entertainment is the transition from linear to streaming and that with under 10% of total TV screen time in the U.S., our biggest market, Netflix has tremendous room for growth if we continue to improve our service,” added the streaming subscription service.

Q1 2022 forecast

Netflix provided the following forecast for the first quarter of 2022:

• Total revenue of $7.9 billion, representing 10.3% growth year-over-year
• Operating income of $1.8 billion
• Operating margin of 22.3%, a significant increase over Q4 2021
• Net income of $1.3 billion
• Diluted earnings per share of $2.86
• Total global streaming paid memberships of 224.3 million, representing paid net additions of 2.5 million and an 8% increase year-over-year

Insider Take

This major hit to Netflix’s stock value feels like an overreaction to the streaming company’s fourth quarter financials. Certainly, the margin, net income and earnings took a hit, but overall, Netflix had an excellent year. The changes were expected, and total revenue grew in the double digits. On top of that, the first quarter 2022 forecast is fairly positive, with the exception of the low projected paid net adds. The price increase should make up for potential churn, and Netflix’s strong content slate, continually improving user experience, and diversification into other areas (e.g., podcasting, mobile gaming, merch) will help balance the leveling off of membership growth which is going to happen to all streaming services eventually. It may take a while for Netflix to bounce back from the stock hit, but we expect the company to rebound. This may be painful temporarily, but Netflix won’t be down for long.