Netflix shares plunge over 35% after company posted loss in users in the first quarter
Netflix lost over a third of its value in the market on Wednesday after the company posted a loss in customers for the first time in 10 years.
Summary in Brief
Key Insights into Stock Price Decline
Shares of Netflix Inc opened lower at $245.20 on Wall Street and continued to decline further. hitting an intraday low of $212.51 before closing at $226.19. The stock also hit its 52-week low on the day. The plunge in the price of Netflix shares cost the American streaming service provider dearly. The company lost $54 billion in market value due to the heavy sell-off.
The key reason behind the sharp decline in Netflix shares is the decrease in the subscribers base. The streaming giant lost around 200,000 users, revealed from the Q1 results that the company posted on Tuesday. After growing at a rapid pace of adding nearly 25 million subscribers every year on an average, loss in user count has affected the investors’ confidence a lot. The first time Netflix lost subscribers was in 2011.
To make things even worse, the streaming company also projected that it might lose another 2 million subscribers in the next quarter. Things are not going well for Netflix, as its stock is already down by over 62% in the last 12 months. The company’s valuation was at its peak at $300 billion in the previous year. It now only stands at $100 billion, which makes Netflix the company with the lowest valuation in the FAANG group. Above Netflix sits Facebook, which also has been facing investors’ wrath for some time.
Reasons Behind the Crash
The company has majorly blamed the Russia-Ukraine crisis for the decline in user base. However, it has given other reasons as well.
Russia-Ukraine crisis
Netflix suspended its operations in Russia as part of supporting Ukraine against Russian invasion. Furthermore, the war torn Ukraine has also accounted for subscriber loss. It lost overall 7 million customers due to the crisis, which resulted in a loss of 3 million subscribers in Europe, Asia, and the Middle East.
Password sharing
Netflix pointed out that over 100 million households use its streaming service and don’t pay for it, through the 222 million paying households. The company gave a hint of warning of a global crackdown on non-paying users. The most interesting fact is that 30% of these non-paying users are in the USA and Canada itself. The company has already raised subscription prices in these two countries recently.
Competition from other streaming subscription service companies
Another and the most natural cause of the decline of Netflix’s user base is the growing competition in the industry. Services like Amazon Prime, Disney, and others have performed fairly well in the past few years and are now giving Netflix a scathing challenge. Netflix still remains the most popular streaming service provider outside the USA.
Increased subscription cost
As said, Netflix has already increased prices in the USA and Canada and has also made its service more expensive in some other countries as well over the past 6 months. The company said that the decline was expected because of the hike in prices. Out of the four major regions where the company offers its services, it suffered user loss in three of them. It lost over 6 million subscribers in the USA and Canada alone.
Netflix’s plan to regain the lost base!
Even though the first quarter's result is worse, Netflix expects to add more subscribers this year. The company has planned a few things through which it hopes to gain further ground.
Crackdown on non-paying users!
Although still not clear, the streaming platform has given a subtle warning to the non-paying users. The 1 million households who are not paying but using Netflix’s services through password shares hampers the company’s revenue generation a lot. However, cracking down on these users would not be ideal for the company. Either it will backfire or will be futile at the end.
Introducing cheaper, advertisement-included plan
The company is likely to introduce a cheaper plan(s) to expand its user base by competing on price. Such a service will also include advertisement, which will help the company to meet the expenses and generate revenue. We may see this plan getting introduced in a couple of years.
Less spending on films and TV shows
Netflix also said that it will spend less on making movies and TV shows in order to cut expenses. The loss in users has had a negative impact on the company’s revenue.
What do the Netflix stock price decline signals?
The plunge in Netflix stock price was also echoed in other similar stocks. Shares of major streaming-related companies performed poor and lost heavy chunks on Wednesday. Paramount Global shares tanked by 8.1%, followed by 5.8% decline in both Walt Disney and Roku, and 5.2% in Warner Bros Discovery.
Slowdown after pandemic-era growth
Many analysts believe that these streaming companies have gained humongous subscribers during the pandemic. The lockdown left people with very limited entertainment options, in which streaming movies and TV shows were the most preferred. Now that lockdown from almost every region has been lifted completely, users are not feeling that much inclined towards watching streaming content. Furthermore, the resume in work from office has left many people with no or little time to watch Netflix and other platforms, which is also a major reason for the decline in subscriptions.
Overvaluation
Overvaluation of these streaming companies is also a key reason behind why they are losing investors’ confidence. Even after declining more than 60% in the last 12 months, Netflix’s P/E ratio is more than 20. Experts also believe that Netflix will no longer be seen as a growth valued stock. This will also be reflected in mutual fund portfolio managers shedding Netflix's share from the portfolio.
Interesting results that are in News post Netflix share decline
The Netflix share crash story has taken up a lot of space in the trending news.
Bill Ackman no longer prefers ‘Netflix and chill!’
One such news that drew a lot of attention was celebrity billionaire investor Bill Ackman losing over $430 million in his Netflix investment. After buying 3.1 million shares amounting to an investment of $1.1 billion in the streaming service company, Ackman sold his stake with a loss of more than $430 million. He purchased Netflix shares 3 months ago in January when there was a dip in the stock. At the same time the shares were trading around $359.
Elon Musk taking on twitter to explain the reason behind the Netflix loss
Elon Musk took on Twitter with others to comment on Netflix’s first quarter result. "The woke mind virus is making Netflix unwatchable," the Tesla CEO tweeted on Wednesday in a reply to a tweet by Slashdot.
JP Morgan downgrades Netflix rating
JP Morgan, downgraded Netflix stocks rating to further inflict pain to the already suffering Netflix stock. The firm downgraded Netflix from ‘overweight’ to ‘neutral’ after the company performed entirely opposite to its expectations. To recall, both Netflix and Wall Street forecasted that the streaming service company will gain around 2.5 million subscribers in the first quarter of 2022. JP Morgan has earlier given Netflix a target of $605 by December 2022, which now has been reduced to $300. The firm says that there won’t be anything exciting to look after in Netflix stock in the coming few months.
How impactful is the Netflix stock crash?
The decline in Netflix share price was also reflected in NASDAQ, which lost 0.7% before closing at 13,522.73 on Wednesday. Netflix is also a FAANG group stock and enjoys a hefty space in many mutual funds portfolios as well. However, some of the big American companies like IBM and Procter & Gamble listed on DOW posted strong quarterly results, which helped in restoring investors’ confidence in the American market that has been struggling for quite some time.