Netflix shares plunge more than 35% on lost subscribers
Netflix shares plummeted over 35% to $214 in the early trade
It lost over 200,000 subscribers in the first quarter of FY22
Netflix is considering a lower-priced ad-supported model
Netflix lost over 200,000 subscribers in the first quarter of FY22 and forecasts another 2 million in the ongoing second quarter, according to the company’s first-quarter report released on Tuesday.
Shares of the streaming services company plummeted over 35% to $214 in the early trade on Wall Street. On Tuesday, it sank 25% in after-hours trading to close at $348.42 per share after Netflix reported its first loss in worldwide subscribers in more than a decade.
In January, Netflix reported that it had 221.84 million customers at the end of 2021. Netflix reported it slipped to 221.64 million subscribers over the three months ending March 31, 2022, which includes the premieres of ‘Bridgerton’ Season 2 and ‘The Adam Project’.
The streamer said several headwinds are impacting growth, including competition and relaxation of pandemic restrictions. The company had got a significant boost from coronavirus lockdown orders, as more people sought digital entertainment. But people spent less time on digital platforms as vaccines rolled out and mandate eased.
Slower household broadband growth also contributed to the company's weak forecast. According to Netflix estimates, 100 million households are sharing their subscription passwords with other family or friends, making it tough to grow memberships.
Netflix laid out plans to contribute to growth. The company is considering a lower-priced ad-supported model and a crackdown on password sharing. The results led to a series of downgrades from Wall Street over concerns about the company’s long-term growth potential. Some analysts believe that these changes will take a year or two to be relevantly implemented.
Bank of America analysts said, “Although their plans to reaccelerate growth (limiting password sharing and an ad model) have to merit, by their admission they won’t have a noticeable impact until ’24, a long time to wait on what is now a show me a story”. The firm downgraded Netflix on a weak quarterly report.
Netflix's first-quarter financial reports beat Wall Street's estimates for earnings but fell short on revenue. Netflix announced diluted earnings per share (EPS) of $3.53 on revenue of $7.868 billion against the expected EPS of $2.89 on revenue of $7.93 billion. Revenue increased 9.8% compared to the first quarter of 2021.
Operating income was reported as $1.97 billion, with a 25.1% operating margin. Netflix's net income for the quarter was $1.6 billion.
Wells Fargo downgraded the stock to an equal weight that “negative sub growth and investments to reaccelerate revenues are the nails in the NFLX narrative coffin, in our view”.
Other streaming service companies also saw their shares dip along with Netflix. Disney slid 5% after markets opened on Wednesday. Roku tumbled more than 7%, Warner Brothers Discovery lost 5%, and Paramount stock slipped 11.7%.
“Gross adds activity continues to be softer than expected, as such, subscription companies could see similar pressures throughout this earnings season, though we note NFLX is unique in that it is much more penetrated, particularly when accounting for password sharing,” said Wolfe Research in a Tuesday note. The firm maintained its outperform rating.