Netflix stock plunges 39% on slowing revenue growth, subscriber losses
It’s the first time the streaming platform has reported a subscriber loss in over a decade and a sign that the future of streaming may be changing.
Shares of streaming giant Netflix (NFLX) are crashing Wednesday after the company announced a flurry of disappointing news that have rattled investors and prompted Wall Street analysts to rethink their outlook on the stock. The stock cratered in after-hours trading Tuesday following the company’s reported first-quarter financials. It extended losses into Wednesday’s trading session, falling as low as $212.51 and wiping out more than $50 billion in market cap.
Streaming video services stocks Walt Disney (DIS), Roku (ROKU), Paramount Global (PARA) and Warner Bros. Discovery (WBD) are also slumping at the time of this writing Wednesday morning. Investors may be resetting their expectations for video-streaming stocks, which exploded during the stay-at-home era, as consumers may be looking to spend less time and money watching content at home.
What happened?
Netflix reported a first-quarter loss of 200,000 paid subscribers, its first subscriber loss in over a decade, and provided troubling guidance for the quarter ahead. The company expects to lose 2 million more subscribers in the second quarter and forecasts a further slowdown in revenue growth.
Netflix previously told investors it was expecting to add 2.50 million new subscribers in the first quarter.
The company said that the suspension of its service in Russia and the winding-down of all Russian paid memberships resulted in a loss of 700,000 new subscribers. Excluding that loss, the company said it would have netted 500,000 new subscribers.
Netflix also cited password-sharing and increased competition from new streaming services for its weakening subscriber growth. The company said it expects these trends to continue into the second quarter, which has historically seen fewer new subscribers than the first quarter, resulting in deeper losses.
According to Netflix, more than 100 million households are sharing account access with people outside their household. The company said account sharing as a percentage of its paying membership hasn’t changed much over the years, but that the issue is now at the forefront considering the recent stall in paid subscriptions.
“Our revenue growth has slowed considerably,” the company wrote in a letter to shareholders Tuesday. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds.” The streaming giant currently has 222 million subscribers worldwide, partly fueled by a pandemic-led surge in customer growth in 2020. The company is now seeing this growth subside, and even turn negative, as consumers weigh their content-streaming options and possibly spend less time streaming content overall.
Likewise, Netflix’s revenue growth has slowed dramatically since the onset of the pandemic. The streaming platform reported first-quarter revenue of $7.9 billion, a 9.8% increase from the same period last year. This is down from 24.2% seen in the first quarter of 2021. The company saw year-over-year revenue growth of at least 20% in every quarter in 2020.
The company expects second-quarter revenue to grow 9.7% year over year to $8.1 billion. This compares with a 19.4% growth in the same year-ago quarter.
Here are the key numbers from Netflix’s first-quarter report.
| Reported | Expected | |
|---|---|---|
| Earnings per share (EPS) | $3.53 | $2.90 |
| Revenue | $7.9 billion | $7.9 billion |
Netflix’s plan to grow viewers and revenue
Netflix said it’s exploring ways to reaccelerate viewing and revenue growth, which includes improving the quality of its programming and monetizing password-sharing. The company noted that it’s already begun testing different approaches to make money from non-paying households, including two new paid sharing features, where current members have the choice to pay for additional households. This feature is currently only being tested in three markets in Latin America.
Though the streaming giant has not laid out exactly how much it intends to spend this year on content, the company budgeted at least $17 billion for 2021. The company said it’s now “doubling down” on story development, as it looks to expand its current and future content offerings and grow — and retain — its share of US viewership. So it will likely at least maintain this level of investment.
The company has already seen record viewership so far in 2022. For example, Netflix recorded 627 million hours viewed for the second season of its original series Bridgerton, which aired in March 2022. It’s the biggest English language series in the company’s history. Tinder Swindler, released in February, is Netflix’s biggest documentary film ever released with 166 million hours viewed.
“Higher view share is an indicator of higher satisfaction, which supports higher retention and revenue,” the company said.
After years of resisting, the company also said it’s exploring lower-priced, ad-supported plans, which it expects to offer to consumers over the next year or two. “Allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense,” Netflix co-founder and co-CEO Reed Hastings said during an earnings call with investors on Tuesday. “Think of us as quite open to offering even lower prices with advertising as a consumer choice.”
Now what?
Netflix pioneered the shift to streaming video services, but investors may now be resetting their expectations for how Netflix is innovating in this space.
The stock is down 62% this year and is well off its 52-week high of $700.99.
For a 5-year view of the performance of this stock, see the graph in our dedicated guide.
Wall Street too is shifting its stance on the stock, as analysts reevaluate the company’s future prospects.
At least nine downgrades came in this morning, with several price targets nearly cut in half. In contrast, only one analyst upgraded the stock, according to Wall Street Journal data. Needham analyst Laura Martin upgraded her rating from Underperform to Hold.
Still, the $493.92 average analyst price target represents a 119% premium over the stock’s current price of around $225.
Netflix’s $17 billion planned spending on content in 2021 didn’t seem enough to stop fleeing subscribers, who were looking for lower price points. This is where a lower-cost, ad-supported model could be beneficial for the platform.
As competition mounts and the COVID surge dissipates, investors will be looking for Netflix to continue to innovate and adapt to the shifting landscape, and will want to see sure signs of profitability and growth overall.
At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.
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