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Netflix Dives on Subs Growth; Jim Cramer Says 'Weakest of the FANGS'

Netflix forecast modest subscriber growth for the current quarter, but insisted COVID, not competition, is behind the weaker-than-expected additions.

Netflix Inc  (NFLX) - Get Netflix Inc. Report shares tumbled in pre-market trading Wednesday after the streaming service said COVID disruptions would continue to dampen subscriber growth after a softer-than-expected first quarter earnings report. 

Netflix said it expects to add around 1 million new subscribers to its streaming service -- the largest in the world -- this quarter, a figure came in well shy of Street forecasts of around 4.8 million. The estimate followed a weaker-than-expected March quarter tally of 3.98 million, which also missed analysts' estimates of a 6.25 million total.

Production delays, Netflix said, as well as a surge in 2020 additions -- which nearly hit 40 million -- hit first quarter growth, but new releases expected in the second half of the year should support growth. 

Jim Cramer, founder of TheStreet, said in a tweet that Netflix was "a big reset but i doubt it will be counted out. It is the weakest of the FANGs."

"In terms of Q1 performance, it really boils down to COVID, frankly (which) continue to have a big impact on the world." CFO Spencer Neumann told investors on a conference call late Tuesday. "For us, at a minimum, it creates just some short-term kind of choppiness in some of the business trends that we see.

"And we also have a near-global shutdown in production which we've been ramping safely and at scale through much of last year and into this year, but it did push some key title launches into the back end of this year," he added. "So the combination of those two things does create some noise (and) it's super hard to forecast quarterly subscribers, particularly in this environment." 

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Netflix shares were marked 7.5% lower in early trading Wednesday to change hands at $508.60 each, a move that wipes out all of the stock's year-to-date gains. 

The group's first quarter bottom line came in at $3.75 per share, well ahead of the Street consensus forecast of $2.97 per share, on revenues of $7.14 billion that were largely in-line with analysts' estimates.

However, CEO Reed Hastings insisted that intensifying competition in the streaming space -- with new entrants such as Disney  (DIS) - Get The Walt Disney Company Report, Comcast  (CMCSA) - Get Comcast Corporation Class A Common Stock Report and AT&T  (T) - Get AT&T Inc. Report -- were not a factor in its near-term forecasts.

"We really look through all the data in different regions where new competitors are launched or are not launched and we just can't see any difference in our relative growth in those regions," Hastings said. "So there's no real change that we can detect in the competitive environment. It's always been high and remains high."

Netflix finished the quarter with 208 million paid memberships, up 14% year over year, but below its own guidance of 210 million paid memberships. 

"We view the softer 2Q subscriber outlook (3.6M below Street estimate) on C19 delaying new content as transitory, and see a favorable backdrop for back-half net adds on accelerating production releases later in the year," said Oppenheimer analyst Jed Kelly. "In addition, churn is now below pre-price increase levels, a solid indicator for pricing power, especially with a massive content library that will benefit from the company returning to full production faster than competitors."

"We see Netflix on a clear trajectory towards improving margins while free cash-flow is inflecting positive to fully self-fund productions and establish a $5 billion buyback program," he added.