Netflix shares plummet more than 35% after reporting a drop in users and revenue

Netflix shares lose more than a third of their value on Tuesday, after it reported its first drop in subscribers in a decade, leaving Wall Street questioning its growth in the face of fierce competition and viewer fatigue after the pandemic.

After the first negotiations on Wall Street, the streaming pioneer's shares fell 35% to $223 and were set to mark its worst day in a decade if losses continue. At least a dozen analysts were quick to moderate their views on an action that has performed prominently in recent years.

“Netflix is an example of what happens to growth companies when they lose their growth,” said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh. “People buy growth companies because they think their cash flow is going to grow, so they pay up front to anticipate that. When an action like this falls, people looking for growth quickly withdraw.”

The stock crash could erase the profit of the last two years, when his business prospered as new customers joined his platform to weather the lockdowns.

Netflix planned to incorporate 2.5 million customers in the period considered - and analysts expected even more - but, on the contrary, it lost subscribers to a total of 221.64 million viewers.

“The suspension of our service in Russia and the progressive decline in the number of paid Russian subscribers led to a net loss of 700,000 subscriptions. Without this impact, we would have had 500,000 additional subscribers” over the last quarter of 2021, the company said in a statement.

The firm had a turnover of $7.9 billion in the first quarter of the year, 10% more than a year ago in the same period, thanks to the increase in the number of subscribers in 12 months (+6.7%) and an increase in fees.

In an effort to calm nerves, Netflix executives on Tuesday told analysts that they were studying offering an ad-supported service for the next year or two and promised to crack down on password sharing, a long-standing problem for the service.

Netflix rivals already have ad-supported versions or are considering one: HBO Max offers an ad-supported subscription, while Disney+ recently said it would launch an ad-supported service.

Demand for fresh and engaging content is also increasing, forcing Netflix and others to think about larger production budgets, even as costs increase in an inflationary environment.

“Netflix's profitability or business model is not the problem, as the figures show, but that some consumers may be canceling their subscription due to inflation and user fatigue following the pandemic,” said Peter Garnry, head of equity strategy at Saxo Bank.

The JP Morgan brokerage was the most aggressive in halving its price target, to $305, well below Wall Street's average target of $400. “Short-term visibility is limited (...) and there isn't much to be excited about in the coming months beyond the new, much lower stock price,” said J.P. Morgan analyst Doug Anmuth.

Anmuth also halved its estimate of the number of net subscribers in 2022, to 8 million.

For the second quarter, Netflix has prepared new seasons of the popular series “Ozark”, “Stranger Things” and “Grace and Frankie”.

Needham, however, took a different view. The brokerage has improved its rating on actions to be “held” from “underperforming”, encouraged by the company's plans to add a service with advertising at a low price.

(With information from Reuters and AFP)