Netflix shares ended a brutal session of heavy trading down 35%, its biggest selloff since 2004 as the streamer shed $57 billion in market value. The plunge and accompanying commentary appeared to mark the streamer’s long honeymoon with investors — taken aback by the company’s surprise admission of slowing growth and discouraged by a long-lead time and lack of clarity around potential solutions.
“We have witnessed a company go from growth darling to growth purgatory in an instant,” MoffettNathanson said.
In a Q&A after disappointing first quarter earnings, Netflix offered up an future advertising tier, but without details. “The matter-of-fact disclosure by the company in the interview and not in the press release was odd and almost a throwaway line,” said MoffettNathanson. “Now comes the tricky part. With UCAN RPUs [U.S./Canada revenue per user] of nearly $15 and near market saturation, how will the company introduce an ad tier without cannibalizing their subscription revenues? How and where will they go to market? What are the costs of building out this endeavor?”
The questions rolled in — including whether the company’s stock has gotten cheap enough for new buyers to step in. Reed Hastings, who bought shares on a dip after fourth-quarter earnings, took a bath alongside Netflix investors.
“Netflix hit a wall,” said BoFA Securities. “The Street now knows that the low guide last quarter was not an aberration, and we expect it will take a while for investors to believe NFLX can return to growth… Management made it clear that we can expect very low subscriber growth in ’22 and ’23 with no margin expansion as they hope to roll out these changes to reaccelerate growth in 2024. Possible in our view, but a long time to wait for most investors.”
Hastings said the company plans to outsource its advertising function so that it could continue to focus on content. Netflix wasn’t commenting today beyond what executives said Tuesday after losing 200,000 subscribers in the first three months of the year (the number would have grown by about 500k ignoring the impact of turning off the Russian market.)
Monetizing password was the other prong. Management noted progress on beta testing in Chile, Costa Rica, and Peru but will need a year or so of testing before a global launch (including the US). That should expand ARPU somewhat as some of the 100mn+ households globally who benefit from password sharing – including 30 million in the U.S. and Canada — begin to contribute. But it won’t do a lot for subscriber numbers.
Netflix said it expects revenue and paid net add growth in the back half of the year and it continue to expect positive free cash flow.
Netflix is the first media company to report this earnings cycle. Numbers and commentary by the rest of the group unspooling over the next few weeks will be critical to how investors view the sector overall. Streaming-centric stocks from Paramount Global to Disney to Roku faltered. Issues at Netflix have a direct impact on media company valuations where a sum-of-the-parts approach is used — with Netflix as the benchmark for media streaming services, analysts noted.
“If Netflix thinks the near-term upper band for paid streaming subscribers is hitting a wall at 220 million, then any companies with large out-year subscriber and RPU targets should be a bit more nervous today,” MoffetNathanson said.
A Netflix ad tier poses a risk that a raft of new video inventory will pressure pricing for all legacy linear, AVOD, and SVOD ad sellers.
Companies led by Netflix have been investing heavily in content, a move which had started to spook investors months ago. It wasn’t clear if or by how much that may taper down given the newly acknowledged challenges to streaming, which include a slowing rollout of Smart TVs and macro factors like inflation and slow economic growth, among others.
PREVIOUSLY: Netflix stock crashed at the market opening Wednesday, down by 35%, shedding well over $50 billion in market value after its latest earnings and commentary late Tuesday spooked investors.
Plans to launch an advertising tier and to crack down on password sharing didn’t assuage Wall Street because they aren’t quick fixes for a streaming business that appears to lack clarity now after the longtime highflying industry leader reported softer-than-expected subscriber numbers for the three months ended in March and predicted an historic sub decline for the current quarter. Pivotal Research Group analyst Jeff Wlodarczak called the sub numbers “shocking.”
If the stock dip holds for the session, it will be the company’s biggest daily share decline in a decade.
Netlix said Tuesday its global subscriber base declined by 200,000 from where the company ended 2021, a rare reversal and far from the internal projection of 2.5 million additions in the period. It’s also the first negative move for subscriber levels in more than a decade. Netflix also said it expects to post a loss of another 2 million in the June quarter.
Wall Streeters were alarmed equally by the numbers, as by management’s apparent surprise at the downturn in the business. Execs cited a handful of factors they believe are behind the company’s inability to return to pre-Covid growth levels after a spurt in signups during the pandemic, from new rivals to macro impacts and slower smart TV deployment. But a video Q&A post-earnings “portrayed a company that was more surprised by things and less clear than ever about the path forward,” said analyst Michael Nathanson.
Executives dropped the key ad pivot news — which his a huge deal for a company that’s always insisted proudly on being ad ad-free — unexpectedly in the middle of the Q&A. “Ultimately, the question of Netflix and ads is whether this is the answer that they truly believe in or is this desperation from a management team that does not know what is happening to their business right now?” wrote analyst Rich Greenfield.
Netflix also will crack down on the 100 million viewers that share passwords and don’t pay for the service.
“Management made it clear that we can expect very low subscriber growth in ’22 and ’23 with no margin expansion as they hope to roll out these changes to reaccelerate growth in 2024. Possible in our view, but a long time to wait for most investors,” said Bofa Global Research, downgrading the stock from “buy” to “underperform.”
Netflix woes are weighing on the streaming sector with Paramount Global shares down over 11%, Warner Bros Discovery off by some 6% and Disney by about 4%.