Investors in US-headquartered Netflix Inc have punished the company, which saw its shares plunge 35 percent, erasing $54 billion of market value in its biggest drop since 2004.
Shares swooped to an 18-year low after Netflix reported a shocking loss of 200,000 subscribers in the first quarter of 2022, the first time it has shed subscribers since 2011.
The swoon made Netflix the worst-performing stock of the year on both the benchmark S&P 500 and Nasdaq 100 indexes, and sent shock waves across the media universe which were felt by Warner Bros, Discovery Inc, Roku Inc, and others, Bloomberg reported.
Netflix is seeking ways to stop a loss of subscribers and combat investor fears that its best days are over. Co-founder Reed Hastings had said for years that he doesn’t want to offer advertising and had no problems with password sharing.
Investors, analysts and Hollywood executives had been bracing for the company to report a sluggish start to the year, but Wall Street still expected Netflix to add 2.5 million customers in the first quarter. The shares were already down more than 40 percent this year.
“It’s just shocking,” said analyst Michael Nathanson of MoffettNathanson LLC. “Everything they’ve tried to convince me of over the last five years was given up in one quarter. It’s such an about face.”
Netflix also projected it will shrink by another 2 million customers in the current quarter, a huge setback for a company that regularly grew by 25 million subscribers or more a year. Netflix will also curb its spending on films and TV shows in response to the customer losses, Bloomberg reported.
Hastings and co-Chief Executive Officer Ted Sarandos had previously dismissed the company’s slowing subscriber sign-ups as a speed bump related to the pandemic, which had accelerated Netflix’s growth in 2020. But the company’s growth hasn’t returned to pre-pandemic levels.
Four causes for Netflix’s loss of subscribers
Management pointed to four causes, including the prevalence of password sharing and growing competition. The company said there are more than 100 million households that use its service and don’t pay for it, on top of its 221.6 million subscribers.
The Los Gatos, California-based company is experimenting with ways to sign up those viewers, such as asking people who are sharing someone else’s account to pay, Bloomberg reported.
“It allows us to bring in revenue for everyone who is viewing and who gets value from entertainment we’re offering,” said Greg Peters, the chief operating officer said during an interview with analyst Doug Anmuth of JPMorgan Chase & Co.
A warning sign for other subscription-based business models
Netflix’s troubles are a warning sign for its peers and competitors. After watching millions of customers abandon pay TV for streaming, U.S. entertainment giants merged and restructured to compete with Netflix.
Investors encouraged this strategic shift, boosting shares of companies like Walt Disney Co. that demonstrated a commitment to streaming.
Investors have begun to question whether some of these media companies will sign up enough customers to justify all the money they are spending on fresh programming.
Disney fell as much as 5.5%, while Warner Bros. Discovery, the owner of HBO Max, declined as much as 7.3%. Roku, the maker of set-top boxes for streaming, dropped as much as 8.9%.
All of these competitors offer advertising-supported services, or are planning to do so in the near future. Analysts and competitors have speculated for years that Netflix would offer advertising, only to be rejected by Hastings. Netflix always said its viewers preferred its service over cable TV because there were no ads. Hastings also didn’t want to compete with Google and Facebook in selling ads online. Yet he has finally relented.
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