Netflix loses $54 billion in market cap after shocking subscribers

UPDATED: Netflix shares plunged to their lowest point since January 2018 as investors reacted to the streamer’s first loss of subscribers in more than a decade, slamming a halt to years of booming growth.

The shares closed down 35.1% on Wednesday at $226.19 a share, marking the biggest one-day drop in Netflix history in percentage terms. The company lost $54.4 billion in market capitalization overnight, the largest single-day drop in its history. The second-biggest drop came in January, when $49 billion in market cap fell after fourth-quarter subscriber additions fell short and Netflix warned of slowing growth.

Shares of Netflix fell to a low in more than four years, their lowest level since the stock closed at $220.46 on January 19, 2018, after the company posted a loss of 200,000 subscribers in the first quarter and projected that it will lose another 2 million subscribers in the second quarter, prompting a wave of analyst downgrades. Netflix shares have lost 65% of their value in the last six months.

Among other factors, Co-CEO Reed Hastings blamed the drop in subscribers 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 aims to convert free-load password users into subscribers and launch a lower-cost, ad-supported tier within the next two years.

“I know it’s disappointing for investors, and it’s safe,” Hastings said in Netflix’s first-quarter video interview on Tuesday. “But internally, we are really ready, and this is our time to shine. This is when everything matters. And we are super focused on achieving those goals and getting back in good hands with our investors.”

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After the earnings failure, Pivotal Research Group analyst Jeff Wlodarczak lowered his rating on the stock from “buy” to “sell” and lowered his 12-month price target by almost 60%, to $235 a share.

“Following what can only be called a shocking first-quarter subscriber loss and weak subscriber and financial guidance, we lowered our subscriber forecasts and substantially delayed our profitability forecasts,” Wlodarczak wrote in a note to clients.

Netflix’s first-quarter report exacerbates investor concerns that “streaming appears to be almost fully penetrating globally post-COVID,” the analyst added. “The NFLX flywheel has slowed down substantially, and it will take time to get it back on track, likely creating substantial uncertainty around the name for at least the rest of 2022.”

Wlodarczak is bearish on Netflix’s plan to offer a cheaper ad-supported tier, calling it a net negative because “we think it cheapens the brand and product compared to the current great consumer experience and introduces ad volatility into the bottom line.” .

Netflix’s revelation that more than 100 million freeloaders (including 30 million in the US/Canada) are taking advantage of someone else’s account “is further evidence that the product has reached maturity in key markets” , MoffettNathanson principal analyst Michael Nathanson wrote in a note. The company acknowledged intensifying competition, telling investors it expects to increase viewing share while slowing growth in content spending. “We questioned how easy that would be in a world where everyone wants to participate 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 way forward,” Nathanson wrote. The firm maintained a “neutral” rating on Netflix and cut its 12-month price target to $245 per share from $350.

For Netflix, first-quarter results reflected a “perfect storm of home market saturation, competition for content, competition for subscribers, inflation and an unwelcome price increase,” Wedbush Securities analyst Michael Pachter said in a research note. . Those problems were exacerbated by the Russian invasion of Ukraine and the corresponding economic sanctions imposed on Russia.

“We would stay on the sidelines until there is evidence that Netflix is ​​a growth company once again,” Pachter wrote, reiterating Wedbush’s “neutral” rating and lowering the price target to $280 per share from $342.

Netflix’s moves to monetize password sharers and roll out an ad-supported tier are unlikely to bring significant change to its US business any time soon, according to Neil Macker, senior equity analyst at Morningstar. The firm lowered its price target for Netflix shares to $280 per share from $305, citing expectations of much lower subscriber growth in 2022 and slower margin expansion.

With the crackdown on passwords, “Netflix may squeeze a few more dollars out of some major households, but we think others will see the new sharing fee as another price hike and drop,” Macker wrote in research. Note. Additionally, many of the non-paying households “may not see the service as valuable enough to pay for it, particularly in higher priced markets like the US and Western Europe.”

Netflix’s loss of more than a third of its market capitalization in one day isn’t the biggest in real dollar terms. 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 plunge in September 2020 and Microsoft’s $178 billion nosedive in March 2020.

Previously, Netflix hadn’t reported a drop in subscribers since the third quarter of 2011, which came after splitting its streaming and DVD-by-mail services. The company’s shares had previously had their biggest one-day share percentage drop on October 25, 2011, when shares fell 34.9% after Netflix reported a net loss of 800,000 customers.