Why is Netflix Stock one of the worst performing on the S&P 500?

October 30 2022

Netflix stock, a member of the infamous FAANG, has fallen 65% from its peak as on 20th Aug 2022. It has underperformed the most compared to the other FAANG companies. Even so, it still boasts a 29.88% stock price CAGR since its IPO in the year 2002.

There were 221.64 million paying Netflix subscribers as of the third quarter of 2021. During the first quarter in 2022, the corporation reportedly lost over 200,000 users. The Netflix stock had the biggest percentage single-day decline ever the day following the release of this news, plunging by more than 35%. During the first quarter in 2022, Netflix’s revenue was over $7.87 billion, rising from over USD 7.16 billion over the equivalent quarter of 2021, according to a Statista research. The same Statista analysis estimates Netflix’s yearly income at $30B. These annual revenue figures for Netflix demonstrate the company’s strong global reputation and potential for continued growth. According to reports from Yahoo Finance, the revenue generated by Netflix is expected to climb at a quarterly rate of 16% over the previous quarter. The largest global provider of VoD services at the moment is Netflix. With over 45 million customers, competitors such as Hulu are gaining ground.

So what happened to the Netflix stock?

Before you buy NFLX stock in India, it is important to understand its current situation and the factors that influence the shifts in Netflix stock. The Netflix stock has been affected by several factors, some of which have been listed below:

Inability to curtail free riders

Netflix memberships are frequently shared by friends and family. Instead of several, there is just one subscription there. However, it is bad for the huge streaming company’s bottom line. The corporation experimented with the concept of adding an extra security barrier to prevent access from those whose whereabouts differ from those of customer accounts. Approximately 33% of all Netflix customers share their credentials with at least one other user outside the home, according to research conducted by Magid in late 2020. 2,235 people worldwide made up the survey’s sample size.

Many people enjoy free access on Netflix because of account sharing. 14% of people watch on their friends’ or family members’ accounts. Additionally, 27% of viewers watch using a household member’s paid subscription. Regular Standard and Premium membership plans can add additional member subscriptions for $2.99 in Costa Rica, 7.9 PEN in Peru, and 2,380 CLP in Chile.

Key markets have reached maturity

The S&P 500’s weakest performer this year, Netflix, is being criticized more than almost any other company. In addition to admitting that they had fallen short of the growth goal they had established for themselves, Netflix officials noted in their earnings report on April 19 that memberships during the first quarter in 2022 had actually decreased. For the first time, they agreed to the claim that Netflix had reached saturation in its home market of North America and will need to adopt alternative revenue-generating strategies.

This year, the US saw a stagnation in the rise of new subscribers. Following the findings, shares, which had dropped nearly 67% this year due to worries as to the company’s long-term potential, increased 8%. Investors interpreted the projection as a hint that Netflix could still attract new customers despite a shaky global economy and indications of market saturation in its two largest markets, the US and Canada. In the second quarter, the streaming company lost 1.3 million users in the US and Canada. In a letter sent to shareholders, Netflix said it had looked into the recent slowdown in more detail and had found a number of causes, including password sharing, competition, and a weak economy.

Continuously reducing market share.

Since the first quarter of 2018, as competition in the SVOD or subscription video-on-demand industry has increased, Netflix’s market share of MAUs among the top streaming applications has decreased. With a market share of 39% in the first quarter of 2022, it continues to control the greatest monthly share of usage in the United States. However, there is fierce competition from more recent platforms, such as Disney+, which despite just having launched in the fourth quarter of last year, ranked third in 1Q22 in terms of monthly active users.

Following Netflix, Hulu had the greatest usage rate (18%), followed by Disney+ (17%), Amazon Prime Video (6%), and HBO Max (10%). Disney+ recorded the second-highest percentage of fresh U.S. downloads amongst major streaming apps, with 17%, behind HBO Max. With the release of blockbuster films and a steady stream of new TV shows, these top two leading adoption companies are enhancing their content offerings. HBO Max had a spike in American downloads, mostly during the second season of Euphoria. Netflix achieved the third greatest share of the adoption market with 15% of U.S. first-time installs in 1Q22 while having a significant lead over HBO Max and Disney+.

Not worth the cost now

Netflix has a pricing that is significantly higher than its competitors, affecting its ratings for customer satisfaction. The “mid tier” of Netflix costs $15 per month, but only allows for two screens to be viewed simultaneously. The package excludes 4K, which on the other hand, is offered by some of its competitors, Netflix. The “premium” subscription that Netflix offers costs $20 a month, with the option to view four screens simultaneously. However, the rates offered by its competitors are comparatively lower, such as:

Disney Plus: $8 per month
Hulu (with no ads): $13 per month
HBO Max (with no ads): $15 per month
Amazon Prime Video: $9 per month

Excessive spending on content

As it introduced more original material to the platform, Netflix has boosted its spending on content every year. The company spent $17 billion on content in 2021. It’s the biggest change for the massive streamer, which has long been reckless with its money and was anticipated to spend in the $20 billion range. The executives emphasized that Covid expenses, which have recently increased total spending, are significantly lower. Stranger Things 4 was mentioned once again in this context; it increased total costs but stopped subscription losses last quarter. Netflix is now cutting back on spending, indicating that the business is having trouble growing its customer base. According to The Information, firm management recently warned staff members to be careful with their spending and recruiting.

Strengthening Dollar

In the results call after the earnings report, American company executives cautioned: the high dollar will hurt their bottom lines. Netflix attributed its Q2 revenue growth below expectations—it recorded a rise of 8.6% vs. a prediction of 9.7%—to the strong dollar. Netflix issued a warning over the impact of the growing US currency on its foreign revenue, which accounts for 60% of its own top line. The rise in the dollar coincides with the Federal Reserve raising interest rates to combat the country’s four-decade-high inflation rate. Last quarter, Netflix acknowledged its weak revenue growth, which it blamed on competition, account sharing, and additional issues like the conflict in Ukraine and slow economic growth.

Things to consider before making a decision on investment in Netflix

Investors may wait for the below things to pan out before plunging in to buy.

Strategies to turn viewership around: advertising

To grow its customer base, Netflix is also planning to create a membership tier that is dependent on advertising. Although it had long rejected the concept, the popularity of competing streaming services such as Hulu had implemented this strategy probably convinced Netflix to follow suit. The addition of ads will enable it to be more competitively priced among people who do not want to be spending $15 to $20 each month, as its cost is significantly higher than that of the competition, which surely affects it client satisfaction scores.

Of course, there is a chance that Netflix will wind up eating into its main streaming tiers. According to a Civic Science poll, up to one-third of current full-price customers could convert to a less expensive, ad-supported tier, affecting income. Not to add that there is some worry following Snap’s earnings report, which showed that lower ad spending had hurt the company’s revenues. It is unfortunate for Netflix that advertisers are beginning to cut back on their spending.

Moderation in spending

Both a terrific innovator and an excessive spender, Netflix was a hazardous investment for investors even while its streaming videos were just a windfall for customers. Shares of digital companies like Netflix and others were surging during the pre-epidemic period. However, considering the competition Netflix was starting to confront and the debt it was racking up, it gradually affected Netflix’s stock.

It is important to understand that there is no longer a solution in simply throwing cash at issue. Additionally, Netflix acknowledged that it needed to “reduce” its spending because of its slowing growth. It must accomplish this if it wants to generate enough cash flow to pay off its $14.6 billion in debt. In 2018, warnings were already concerning the confluence of rising debt and inadequate cash flow. The balance sheet of the corporation is in better condition now. In the most recent quarter, $700 million of debt was paid off. Additionally, it declared that it would use cash generated by itself to pay for the business, capital investments, and debt costs, becoming “free cash flow positive” for the first time ever for the entire calendar year.

Return from the lows

Netflix has run up about 50% from the bottom, so the risk-reward is not favorable now. According to the company’s shareholder letter, Netflix will likely launch in a select few areas with high advertising expenditure. Their goal is to launch it, listen and learn from it, then swiftly iterate to improve the service, as they do with most of their new efforts. Therefore, it is likely that the advertising industry of Netflix will appear very different in a few years from how it does today.

NFLX’s latest quarterly earnings

Netflix had previously informed investors of the Netflix stock that it anticipated losing about 2 million subscribers during the previous quarter. Still, it only lost about 970,000 over the three months ending on June 30. The business presently has 220.67 million customers and anticipates third-quarter net adds to be at least 1 million, recovering some of the year’s first-half losses. According to analysts, Netflix was expected to guide for expansion of about 1.8 million.

These are the outcomes:

According to Refinitiv, the EPS increased to $3.20 from $2.94.
According to a poll by Refinitiv, revenue was $7.97 billion as opposed to $8.035 billion.

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FAQs

How many people will be streaming Netflix in 2022?

During the second quarter in 2022, Netflix had roughly 220.67 million paid customers globally. This is a drop of almost a million members from the previous quarter. Over 73 million of Netflix’s total global members are located in the US and Canada, making up most of its subscriber base.

What are the Netflix demographics?

Since only 50% of customers are over 35, Netflix mostly attracts members of the younger generation, such as millennials and teenagers. Netflix performs incredibly well when it comes to achieving an even split, according to publicly available data on the gender of its employees in 2021.

How much money does Netflix make?

Netflix’s total revenue increased from roughly 7.34 billion in the same period of 2022 to almost 7.97 billion during the second quarter of 2022. The business generated close to $30 billion in revenue annually in 2021, continuing the tremendous year-over-year rise Netflix has experienced over the previous ten years.