Investors of Netflix Inc. punished the company for losing its subscriber shock and suddenly starting to use advertising after years of dodging it.
Investors of Netflix Inc. punished the company for losing its subscriber shock and suddenly starting to use advertising after years of dodging it.
Shares of the streaming industry leader fell 35%, erasing $54 billion in market value in their biggest drop since 2004. The swoon makes Netflix the worst-performing stock of the year. both the benchmark S&P 500 and Nasdaq 100 indexes and sent shockwaves through the media universe, sinking Warner Bros. Discovery Inc., Roku Inc. and others.
Netflix is looking for ways to prevent subscriber loss and counter investor fears that its best days are over. Co-founder Reed Hastings has said for years that he doesn’t want to offer ads and has no problem with sharing passwords.
However, the company is changing course after losing 200,000 customers in the first quarter, dropping subscribers for the first time since 2011. Netflix also expects it to shrink by 2 million more customers in current quarter, a major setback for a company that regularly grows. by 25 million or more subscribers a year. Netflix will also limit spending on movies and TV shows in response to customer losses.
“It’s shocking,” said MoffettNathanson LLC analyst Michael Nathanson. “Everything they tried to convince me over the last five years was abandoned in April. It’s a face. “
Hollywood investors, analysts and executives braced for the company to report a slow start to the year, but Wall Street still expects Netflix to add 2.5 million customers in the first quarter. first. Shares are down more than 40% this year.
Hastings and co-CEO Ted Sarandos previously dismissed the company’s slowing subscriber enrollment as a pandemic-related speed bump that has fueled Netflix’s growth in 2020. But the company’s growth has yet to return to pre-pandemic levels.
Four causes
Management pointed to four reasons, including the prevalence of password sharing and increasing competition. The company says there are more than 100 million households using its service and not paying, over 221.6 million subscribers. The Los Gatos, California-based company is testing ways to register those viewers, such as asking people who are sharing someone else’s account to pay.
“It allows us to bring revenue to everyone who is watching and who gets value from the entertainment we provide,” said CEO Greg Peters in an interview with JPMorgan Chase & Co analyst Doug Anmuth.
Netflix’s troubles are a warning sign for its peers and competitors. After watching millions of customers abandon pay TV for streaming, America’s entertainment giants merged and restructured to compete with Netflix. Investors have encouraged this change of strategy, boosting shares of companies like Walt Disney Co. demonstrate a commitment to streaming.
Investors have begun to question whether some of these media companies are signing up enough customers to justify all the money they’re spending on the new program. Disney fell 5.5%, while Warner Bros. Discovery, owner of HBO Max, is down 7.3%. Roku, the maker of online set-top boxes, fell 8.9%.
All of these competitors offer ad-supported services or are planning to do so in the near future. Analysts and competitors speculated for years that Netflix would offer ads, but was turned down by Hastings. Netflix has always said that viewers prefer its service to cable TV because of the lack of ads. Hastings also doesn’t want to compete with Google and Facebook in selling advertising online. However, he eventually relented.
‘Meaningful’
“Allowing consumers who want lower prices and can afford to advertise makes a lot of sense,” Hastings said Tuesday. Netflix will explore the best way to deliver ads over the next few years.
Cracking password sharing is a risk for a company that started by offering customers a cheaper, more convenient alternative to cable. By driving customers to pay – and inserting ads – Netflix is starting to resemble what it has replaced.
But the company needs help after losing customers in three of its four regions in the first quarter, including more than 600,000 in the US and Canada. Netflix has largely blamed the price increase and said the drop was expected. Russia’s invasion of Ukraine cost the company an additional 700,000 customers when it had to withdraw services in Russia, resulting in the loss of 300,000 customers in Europe, the Middle East and Africa.
Overall, Netflix has forecast subscribers to grow by 2.5 million in the first quarter, roughly matching Wall Street estimates. For the current period, analysts predict a gain of 2.43 million. First-quarter revenue rose 9.8% to $7.87 billion, missing analyst estimates. Earnings, at $3.53 a share, easily topped predictions of $2.91.
“They were never able to explain why or how growth slowed down,” says Nathanson. “Now they decide growth is slowing. How has this changed in two quarters? ”
Asia is the only bright spot. Netflix has added more than 1 million customers in the region, thanks to popular new titles like the Korean drama “We All Die.”
Netflix is still ahead of most of its competitors outside of the US and is the largest streaming service in the world. The company believes it can get out of its current predicament by attracting new customers with better programs and finding more ways to charge its existing user base. The company still expects more customers this year, and more powerful new shows in the second half of the year.
Whether Wall Street believes that is up for debate.
