How will Netflix respond to the horror movie of its latest results?

Billions of dollars were wiped off the company’s value after Wall Street took fright at the group’s stalling subscriber growth

A second season of ‘Squid Game’ is coming, and Netflix needs it after Wall Street took an axe to the company’s shares (PA)

Horrific. Worrying. Intriguing.

You may have seen the three-word bullet points that appear if you leave your TV on the Netflix menu page and it starts to cycle through a screensaver-style rotation of the shows it thinks you might like.

The above selection describes the drama created by the company’s results at the end of last week. More than $50bn went up in smoke when trading in the group’s shares opened and it served up a home-produced horror movie.

Despite a solid line-up of new releases, headed by the successful tandem of Don’t Look Up and Red Notice, with Oscars buzz being generated by Power of the Dog, not to mention the continuing success of the global smash Squid Game, the streaming giant’s growth is noticeably slowing.

New adds undershoot expectations at 8.3 million. The total for the year was half that recorded in 2020, and the lowest since 2015. But the real killer, by Wall Street’s lights, was Netflix’s expectations for the current quarter. If the desultory 2.5 million forecast is realised, it will represent a low not seen since 2010. Analysts had expected more than twice that.

Don’t Look Up’s fictional asteroid duly smashed into the shares, whose tumble was swift and brutal, with the company losing more than a fifth of its value as the party seemed to be over for stay-at-home stocks – those heavily patronised during the pandemic.

There’s your horrific.

Netflix had aimed to be cash-flow positive every year from 2022 onwards, but broker AJ Bell questioned whether that could happen if its growth continued to stall.

The group needs to keep the content conveyor belt rolling to tempt new subscribers, and keep the existing audience on board, at a time when the competition has never been so hot. But it’s costly, and the competition for properties and talent is as fierce as that for subscribers.

There’s your worrying.

Where it gets intriguing is in how Netflix responds, and how it adapts its model to address the challenges it faces.

One way of keeping the cash flowing is, of course, to increase the price subscribers pay. But Netflix has encountered resistance when it has done this in the past, and consumers in markets like the US (and the UK) are facing a nasty squeeze from resurgent inflation.

There is still growth to shoot for. Digital TV Research projects that Netflix will have 270 million subscribers by 2026 compared with about 222 million today. But that envisages a much slower rate of growth than Netflix has become accustomed to.

It’s notable that Disney, in second place but closing fast, is forecast to be in first place by then. The company is helped by the fact that it has the Marvel Cinematic Universe, Star Wars, Frozen and more, all in the same stable, all capable of generating fresh content and fresh revenue from multiple sources, including theme parks.

Netflix doesn’t have anything like that. Small wonder that CEO Ted Sarandos confirmed that the “Squid Game universe” had “just begun”, with a second season on the way. A game, too? It makes all the sense in the world for Netflix, which has already dipped its toes in those waters, to sweat the assets it has.

Its streaming rivals are all part of conglomerates with multiple revenue streams. Disney can expect its parks to come back to life post-pandemic (if, when...) while its Marvel films get cinematic releases, which produce a healthy slug of revenue to defray their production and marketing costs. Other titles go straight to Disney Plus with a view to driving subscriptions. With each release, it becomes more adept at positioning them. Its pragmatic approach to managing this serves the company well.

Netflix, meanwhile, has stuck doggedly to its limited-release strategy, and its home-produced films are typically shot with a view to looking their best on the small, rather than the large, screen (which doesn’t always work for the small screen, but that’s a another debate).

One does wonder whether this might change in future. How much would Don’t Look Up have made with a longer run in cinemas? Isn’t this worth considering when there’s a limit to how many subscribers your new film will add?

How much might the pair of Knives Out sequels, coming from director Rian Johnson, with Daniel Craig reprising his starring role, deliver to the the company’s bottom line if given more of a cinematic life? Netflix certainly paid a pretty penny to get its hands on that nascent franchise.

This is, of course, just the one quarter. But a few more like it will have Wall Street breathing fire down the company’s neck. Necessity is the mother of invention, and of diversified revenue streams.

Even ads? Surely not. But maybe keep an eye on how Amazon, another multi-revenue-stream conglomerate with a streaming service, gets on with its IMDB TV, which will be featuring its own home-produced content. The successor to Bosch, one of subscription-driven Prime’s biggest and longest-running shows, is slated to debut on the ad-funded platform.

“While this added competition may be affecting our marginal growth, we continue to grow in every country and region in which these new streaming alternatives have launched,” Netflix said, which doesn’t sound like a company that feels any need to change its model. Until it has to.

This year’s season of ’Flix Game may yet be the most intriguing since the early days of the franchise.