UPDATED: Netflix shares plummeted to their lowest point since January 2018 as investors reacted to the streamer’s first subscriber loss in more than a decade — bringing years of booming growth to a screeching halt.
The stock closed down 35.1% on Wednesday, to $226.19 per share, marking Netflix’s biggest one-day drop ever in percentage terms. The company shed $54.4 billion in market capitalization overnight, the largest single-day decline in its history. The second-biggest drop came in January, when it saw $49 billion in market cap shaved off after Q4 subscriber adds came up short and Netflix warned of slowing growth.
Netflix shares sank to a more than four-year low — its lowest since shares closed at $220.46 on Jan. 19, 2018 — after the company posted a Q1 loss of 200,000 subscribers and projected that it will lose another 2 million subs in Q2, prompting a wave of analyst downgrades. Netflix shares have shed 65% of their value over the last six months.
Among other factors, co-CEO Reed Hastings blamed the subscriber shrinkage on “great competition” and the company’s estimate that more than 100 million households are streaming the service using a shared password without paying for it.
To try to right the ship, Netflix is aiming to convert freeloading password-users into subscribers and to roll out a lower-cost, ad-supported tier over the next two years.
“I know it’s disappointing for investors, and it is for sure,” Hastings said on Netflix’s Q1 video interview Tuesday. “But internally, we’re really geared up, and this is like our moment to shine. This is when it all matters. And we’re super focused on achieving those objectives and getting back into our investors’ good graces.”
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After the earnings misfire, Pivotal Research Group analyst Jeff Wlodarczak cut his rating on the stock to from “buy” to “sell” and chopped his 12-month price target by almost 60%, to $235 per share.
“After what can only be called a shocking 1Q subscriber miss and weak subscriber and financial guidance we reduced our subscriber forecasts and pushed back our profitability forecasts substantially,” Wlodarczak wrote in a note to clients.
The Netflix Q1 report exacerbates investor concerns that “streaming appears nearly fully penetrated globally post-COVID,” the analyst added. “The NFLX flywheel has slowed substantially, and it will take time to get it going again, which is likely to create substantial uncertainty around the name for at least the balance of ’22.”
Wlodarczak is bearish on Netflix’s plan to offer a cheaper, ad-supported tier — calling that a net negative, because “we believe it cheapens the brand and the product vs. the current great consumer experience and introduces ad volatility to results.”
Netflix’s disclosure that over 100 million freeloaders (including 30 million in the U.S./Canada) are mooching off someone else’s account “is further evidence that the product has hit maturity in key markets,” MoffettNathanson principal analyst Michael Nathanson wrote in a note. The company acknowledged intensifying competition — and told investors it expects to grow share of viewing while decelerating growth in spending on content. “We question how easy that would be in a world where everyone wants to take share in the market by spending more on content,” Nathanson observed.
Overall, Netflix’s earnings report and discussion “portrayed a company that was more surprised by things and less clear than ever about the path forward,” Nathanson wrote. The firm maintained a “neutral” rating on Netflix and slashed its 12-month price target from $350 to $245 per share.
For Netflix, the Q1 results reflected a "perfect storm of domestic market saturation, competition for content, competition for subscribers, inflation and an ill-timed price increase," Wedbush Securities analyst Michael Pachter commented in a research note. Those issues were compounded by Russia’s invasion of Ukraine and the corresponding economic sanctions imposed on Russia.
"We would remain on the sidelines until there is evidence that Netflix is a growth company once more," Pachter wrote, reiterating Wedbush's "neutral" rating and lowering the price target from $342 to $280 per share.
Netflix's moves to monetize password-sharers and roll out an ad-supported tier are unlikely to produce meaningful changes for its U.S. business in the near term, according to Neil Macker, senior equity analyst at Morningstar. The firm lowered its price target on Netflix shares from $305 to $280 per share, citing expectations for much lower subscriber growth in 2022 and slower margin expansion.
With the password crackdown, "Netflix may be able to squeeze a few more dollars out of some of the primary households, but we think that other ones will look at the new sharing fee as another pricing increase and cancel," Macker wrote in a research note. Moreover, many of the households that don’t pay "may not view the service as valuable enough to pay for, particularly in higher price markets like the U.S. and Western Europe."
Netflix's loss of more than one-third of its market cap in one day is not the biggest in terms of actual dollars. In February, Meta, the parent company of Facebook and Instagram, lost about $237 billion in value after warning of revenue headwinds from Apple's iOS privacy changes and increased competition from TikTok. Other massive market-cap losses have included Apple’s $180 billion drop in September 2020 and Microsoft’s $178 billion plummet in March 2020.
Previously, Netflix had not reported a drop in subscribers since the third quarter of 2011, which came after it split its DVD-by-mail and streaming services. The company's stock had previously had its biggest one-day percentage stock drop on Oct. 25, 2011, when shares fell 34.9% after Netflix reported a net loss of 800,000 customers.