Netflix (Nasdaq: NFLX) recently reported its fourth quarter results that sent the stock falling 4% in the after-hours session. While the company outpaced market expectations on all accounts, it was the outlook that has the market worried. It appears that Netflix may really be facing the heat of competition from Disney+ and others.

Netflix’s Financials

Netflix’s Q4 revenues grew 31% over the year to $5.47 billion, ahead of the Street’s forecast of $5.45 billion. Average revenue per subscriber grew 9%. EPS was $1.30, ahead of the market’s forecast of $0.53. The significantly better EPS in the quarter was due to the reversal of a tax provision that the company had made during the first three quarters of the year.

During the quarter, it added 20%, or 8.8 million subscribers, compared with 7.6 million paid subscribers that it had expected to add. Netflix now has over 167 million paid subscribers worldwide. But the company appears to be struggling to add subscribers in the US market. During the quarter, US subscriptions grew by 420,000, falling short of the 600,000 that it had forecast.

Starting this quarter, Netflix is now providing revenues and subscriber numbers by world regions. For North America, Q4 revenue was $2.7 billion with paid memberships of 67.7 million, which grew by 550,000 in the year. Europe, Middle East and Africa revenue was $1.6 billion driven by a net addition of 4.4 million subscribers to end the quarter with 51.8 million paying customers. Latin America revenue was $746 million from 31.4 million paid members, with net addition of 2 million subscribers. Asia-Pacific revenue was $418 million from 16.2 million subscribers, recording a growth of 1.75 million net subscribers.

For the current quarter, Netflix forecast earnings of $1.66 per share on revenue of $5.73 billion. It expects to add 7 million paid global subscribers, compared to 9.6 million recorded last year and falling short of the market’s expected 8.1 million target. The market was looking for revenues of $5.76 billion for the quarter with an EPS of $1.19.

Netflix’s Competition

Disney+ is becoming a big cause of worry for Netflix. Disney+ was launched in November in the US, Canada, and the Netherlands. Within a day of the release, the site had got 10 million sign-ups. The platform is now available in Australia and New Zealand and is expected to grow to Western Europe soon. Disney expects to add 60-90 million subscribers globally by 2024. Within the US, other streaming players are also a cause for concern for Netflix. There are two big competitors slated to enter the domestic market – NBC with Peacock in April and Warner Brothers with HBO Max in May.

Netflix’s answer to addressing the growing competition is to deliver more content and target international markets. Its head start in streaming services is an advantage in several markets. During the last quarter, Netflix continued to release strong content. The Witcher, launched in December, is one of its biggest season one TV series ever. Additionally, Netflix also bagged 24 Oscar nominations this year for films like The Irishman and Marriage Story. Q4 releases also included new seasons of The Crown, Big Mouth, You, and new series and films like Rhythm & Flow and American Son. Netflix keeps its international users happy by adding international content such as the Turkish series The Gift and the French film Banlieusards. It also releases its original films and TV series to all global markets at the same time.

But creating content is not an inexpensive solution. Investors are worried about Netflix’s negative free cash flow. For the recently reported quarter, Netflix ended with -$1.5 billion cash flow compared with a -$1.2 billion reported a year ago. Netflix ended the year with a negative cash flow of $3.3 billion and is expecting to end the current year with a negative cash flow of $2.5 billion. Analysts expect Netflix to spend $17 billion on content this year, compared with $15 billion in 2019. Netflix claims that it will improve free cash flow and turn cash flow positive in the next few years. But as of now, the path to positive cash flow seems elusive.

Netflix’s stock is trading at $326 with a market capitalization of $142.9 billion. It had peaked to a 52-week high of $385.99 in April last year. The stock had fallen to a 52-week low of $252.28 in September last year.