Netflix (NFLX)’s stock dropped by more than 35% on Wednesday after the streaming service announced earnings Tuesday evening that revealed it had lost members for the first time in more than a decade. Wall Street downgraded NFLX due to the report and the lackluster outlook, citing concerns about the company’s long-term growth prospects.
NFLX‘s market cap was reduced by more than $50 billion as a result of the dip. It is currently the S&P 500’s worst-performing stock in 2022, with a year-to-date loss of 62.5%.
What’s behind NFLX’s disappointing performance so far this year? How concerned should shareholders be?
According to the groundbreaking streaming service, several obstacles are impacting NFLX‘s growth, including increased competition and the loosening of pandemic regulations. Stay-at-home orders boosted the video streamer’s profitability, as more customers sought out digital entertainment. However, as vaccinations have been more widely available and restrictions have become less stringent, people have spent less time on digital platforms in recent months.
The company’s poor projection was also influenced by slower residential broadband growth. According to NFLX, 100 million households share their subscription credentials with other family members or acquaintances. NFLX said it’s mulling over a lower-cost ad-supported tier and hinted at a password-sharing crackdown to promote growth. While analysts were generally optimistic about the revisions, they cautioned that they were not a quick fix for the subscriber base problem.
In a note on Wednesday, Bank of America (BAC) stated, “Although their plans to reaccelerate growth (limiting password sharing and an ad model) have merit, by their own admission, they won’t have a noticeable impact until 2024, a long time to wait on what is now a ‘show me story,’” BAC was only one of at least nine other corporations to downgrade NFLX due to its abysmal earnings showing.
Wall Street analysts have weighed in on the situation as well. On Tuesday, Pivotal analyst Jeffery Wlodarczak wrote, “After what can only be called a shocking first-quarter subscriber miss and weak subscriber and financial guidance, we reduced our subscriber forecasts and pushed back our profitability forecasts substantially.” NFLX’s stock was subsequently stripped of its long-held buy rating and downgraded to sell by Pivotal, a well-regarded analyst firm. Wells Fargo (WFC) analysts said in a note that they, too, were downgrading NFLX. WFC stated, “Negative sub growth and investments to reaccelerate revenues are the nail in the NFLX narrative coffin, in our view.”
Interestingly, several streaming service companies – other than NFLX –fell on Wednesday morning as investors awaited new growth statistics. Disney (DIS)’s stock was down nearly 5.5% at the day’s closing. Similarly, Roku (ROKU) stock fell more than 6%, Paramount stock was down 8.6%, and Warner Bros. Discovery (WBD) stock fell approximately 6% on the day. And we might not see the end of this trend.
Wolfe Research, a prestigious research firm, weighed in as well, saying, “Gross adds activity continues to be softer than expected; as such, subscription companies could see similar pressures throughout this earnings season, though we note NFLX is unique in that it is much more penetrated, particularly when accounting for password sharing.” Gross adds activity – the gross increase in the customer base measured in terms of accesses in a period – continues to be softer than expected, and as such, subscription companies could see similar pressures throughout this earnings season, though we note NFLX is unique in that it is much more penetrated, particularly when accounting for password sharing.”
In the early months of the pandemic, users flocked to NFLX as lockdowns and steps to contain the virus kept people at home, bringing the company’s stock price to new highs. Over the last year, NFLX‘s development has been hampered by the relaxation of regulations and increased competition from rival streaming providers.
To stress the gravity of its predicament, the recent loss in NFLX‘s stock was the most significant single-day percentage decrease since October 15th, 2004, when it plunged by 41%. NFLX’s earnings report and massive subscriber loss led to $54.3 billion being wiped off the company’s market valuation in one day, making it the greatest one-day market capitalization loss ever.
