Netflix stock plunges after losing subscribers for first time in a decade

Remote pointed at TV with a streaming service in background
Josh Warner
By :  ,  Market Analyst

Netflix loses subscribers

Netflix has consistently grown subscriber numbers for over a decade but revealed last night that it lost accounts on a net basis, revealing it shed 200,000 subscribers in the first quarter of 2022 as it failed to acquire as many new customers or retain as many existing ones as it had anticipated.

This isn’t going to be a one-off blip either considering Netflix warned it expects to lose another 2 million subscribers in the second quarter.

That has severely altered sentiment around Netflix. The streaming giant had said it planned to add 2.5 million subscribers in the first quarter of 2022 and analysts had expected it to add a similar amount in the second. It also marks a severe downturn from the 8.3 million net additions booked in the fourth quarter of 2021.

Netflix revealed revenue rose 9.8% year-on-year in the first quarter to $7.9 billion and that diluted EPS fell to $3.53 from $3.75 the year before. The topline narrowly missed forecasts but EPS came in better than the $2.89 pencilled-in by analysts. Notably, the firm came up against tough comparatives from the year before considering earnings more than doubled in the first quarter of 2021 amid the explosion in demand for streaming services during the pandemic.

 

Why is Netflix starting to lose subscribers?

There are a number of reasons why Netflix has seen subscriber numbers fall for the first time.

Firstly, Netflix lost around 700,000 subscribers in the quarter after suspending its service in Russia in response to the country’s invasion of Ukraine. Importantly, Netflix would have reported 500,000 net additions if this was excluded.

Secondly, Netflix saw a surge in demand during the pandemic as people spent more time watching content whilst stuck in lockdown. That meant Netflix saw acquisitions of new subscribers accelerate during 2020 and 2021 but this is now unravelling as people spend less time with their televisions as Covid-19 restrictions fade away and get back out and about to socialise.

Thirdly, Netflix has been raising prices in some regions and this appears to have reduced appeal for its service. Whereas it continued to grow its subscriber base in the APAC region, where average revenue per membership (ARPM) dramatically dropped from the previous quarter, it lost users in the US and Canada, as well as the LATAM region, where prices creeped up. It may be of even greater concern that it lost around 30,000 subscribers in EMEA even though prices have remained broadly flat over the past year.

Netflix said it is hoping to grow revenue by around 10% year-on-year in the second quarter as higher prices offset the loss of subscribers.

Lastly, consumers are starting to tighten their belts amid rampant inflation and the cost-of-living crisis. People are now looking for ways to save money at a time when prices are rising, and streaming services appear to be among the first cuts consumers are willing to make to their budgets. People can cancel many streaming services with little-to-no notice, making them an easy saving to make and this will also be stoking fears around demand for other services such as Disney+ and Spotify.

The fact competition is increasing within the video streaming market also means consumers have more choice than ever. It appeared households were willing to subscribe to multiple services as they ditched traditional linear TV, but they are now becoming more selective amid the tougher economic climate.

 

Can Netflix reaccelerate subscriber and revenue growth?

Netflix admits that it is not in control of all the factors that are weighing on its growth, such as the rate of adoption of connected televisions and broadband or the state of the global economy that is starting to suffer from sluggish growth, rampant inflation and the conflict in Ukraine.

The company has, however, outlined some plans to reverse its fortunes in the areas it does control. This includes the crackdown on password sharing, with Netflix believing its 222 million paying households are sharing passwords with a staggering 100 million additional households, including 30 million in core markets in the US and Canada. Netflix believes this is a key area to target as it means it already has 100 million potential new customers that are already using its service. The challenge will be getting them to pay. Netflix says it plans to work on ways to monetise sharing and has warned that growth in ARPM, revenue and viewing will become more important indicators of its performance going forward rather than membership growth.

There have also been reports from the Wall Street Journal suggesting Netflix is considering launching a new lower-priced service that would be supported by advertising in an effort to revive subscriber growth.

Netflix said it needs to continue improving the quality of its programming in order to stand out from the competition and is ‘doubling down on story development and creative excellence’ and introducing new features to improve engagement, such as its new ‘double thumbs up’ tool that allows viewers to show what they ‘truly love versus simply like’. It also wants to extend its lead in producing international and regional content to enhance appeal around the world. Netflix has already had huge success by producing catered films for individual countries or regions and then exporting them to other markets, such as Squid Game and Money Heist.

‘Our goal is to sustain double digit revenue growth, increase operating income even faster (as we expand margins) and generate growing positive free cash flow,’ Netflix said. The company is aiming to keep its operating margin in-line with current levels of 19% to 20% this year even as subscriber growth slows in 2022. Netflix has also generated cash for four consecutive quarters and reported free cashflow of $802 million in the first quarter, which was far better than the $543 million expected by Wall Street, and this should continue throughout the rest of 2022.

 

Where next for Netflix stock?

Netflix shares plunged over 25% in after-hours trading after the release of its quarterly results, sending the stock down to its lowest level in 30 months at $256.

If the stock remains under pressure, we could see shares collapse further toward the next level of support spanning way back to September 2019 at $252. Below there, it could eye a three-and-half year low at $231.

The selloff has pushed the RSI back into oversold territory to suggest it has been overdone, although there is still a bullish RSI divergence as the share price has fallen to fresh lows despite the RSI rising from its January low point. This is reinforced by the fact trading volumes have seen a notable increase over the last five days, with volumes today surging over three times the 100-day average. 

If the selloff does prove to be overdone, we may see Netflix start to recover back toward the previous 2022-low of $330 before it can aim to recapture the 50-day sma, which currently sits at $369 and has proven to be a ceiling for the stock over the last five months.

Netflix stock hits a 30-month low after losing subscribers

 

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