Why Is Netflix Stock Dropping?

When COVID-19 burst onto the international stage in March 2020, the world panicked. Markets crashed, businesses closed, students were sent home, and hospitals overflowed. Entire industries were decimated, and unemployment soared. Arts and entertainment, travel, hospitality, and food service were the hardest hit, but many others struggled. Some are still recovering two years later.

However, while all of this economic turmoil went on, a handful of companies saw unprecedented growth. They were in the right place at the right time with the right product to meet the needs of a suddenly homebound population. Tech companies, including cloud computing services and companies that make computers, mobile devices, and software topped the list of pandemic stocks, followed by e-commerce and at-home entertainment.

Examples of the stocks that benefited most from the pandemic include the FAANGs: Facebook (Meta), Apple, Amazon, Netflix, and Google (Alphabet).

Facebook (Meta)

  • Dec 31, 2019 – Market Cap $585.37 billion
  • Dec 31, 2020 – Market Cap $778.23 billion

Apple

  • Dec 31, 2019 – Market Cap $1.288 trillion
  • Dec 31, 2020 – Market Cap $2.32 trillion

Amazon

  • Dec 31, 2019 – Market Cap $920.22 billion
  • Dec 31, 2020 – Market Cap $1.639 trillion

Netflix

  • Dec 31, 2019 – Market Cap $141.98 billion
  • Dec 31, 2020 – Market Cap $239.49 billion

Google (Alphabet)

  • Dec 31, 2019 – Market Cap $920.32 billion
  • Dec 31, 2020 – Market Cap $1.183 trillion

Other notable stocks that benefited from the pandemic include Zoom, Shopify, NVIDIA, and PayPal.

Unfortunately for shareholders, it seems that the era of pandemic stocks is over. No one knows that better than Netflix.

Netflix stock has gone down 72 percent in the past six months, and the company’s current market cap is just $83.76 billion.

The 52-week high of $700.99 per share stands in stark contrast to the 52-week low of $187.77 per share – and it doesn’t appear that prices have hit rock bottom quite yet. Why is Netflix stock dropping, and what are the chances that Netflix stock will recover?

Why Did Netflix Stock Go Down?

Netflix stock peaked in the fourth quarter of 2021, along with many of its tech industry peers. Since then, it had been trending down at a steady pace until it fell off a cliff in mid-April.

The catalyst?

Netflix released its first-quarter earnings report, and for the first time in company history, the number of subscribers declined.

Instead of the 2.5 million new members projected by business leaders, Netflix netted a loss of 200,000 subscribers. Certainly, the Russian invasion of Ukraine took a toll as Netflix lost 700,000 subscriptions when it suspended operations in Russia, but that doesn’t account for the other two million missing accounts.

Inflation likely played a part in the massive miss, along with increased competition from services like HBO Max and Disney+. Nonetheless, investors were alarmed by the news, and they weren’t reassured by second-quarter guidance. Management expects to lose another two million members in the second quarter.

Yes, revenue still went up for the first quarter, even with fewer subscribers. Year-over-year growth totaled 9.8 percent, but even that failed to impress. After all, Netflix hasn’t had first-quarter revenue growth below 22 percent since 2014.

To date, Netflix has been able to boost revenue at will by increasing the monthly membership fee. Though fees haven’t gone up every year, the average annual increase is roughly five percent.

The trouble is that these increases may not be possible for much longer. At one time, the company believed that it wouldn’t lose any subscribers by gradually pushing up the price of membership but the freedom to set higher fees could be hitting its ceiling.

Members are less loyal to the streaming service now that alternatives are available, and Netflix is considering two moves that are likely to prove wildly unpopular. First, there is talk of putting ads into programming, and second, the company intends to crack down on password sharing.

Considering the company was built on an ad-free, communal password foundation, these are big changes – changes that could accelerate the speed of subscriber loss. That’s a serious concern considering how much more Netflix is paying per net member addition today versus the same period in 2016. In 2016, it cost Netflix just $10.82 for each new subscriber. Now, that figure is closer to $129.

Needless to say, many investors have decided that it’s time to move on, resulting in an enormous sell-off that pushed Netflix stock prices down.

Will Netflix Stock Go Up?

Despite its current difficulties, Netflix still has an extraordinary history of growth. Since launch, Netflix stock has returned more than 15,000 percent. Profit is increasing though the subscriber base is shrinking, and the company’s operating margin is going up. By the end of 2021, operating profit was at 21 percent, and it came in at 25 percent for first-quarter 2022.

Management made it clear that it is taking the declining stock price seriously. The entire model is being evaluated, and it appears that there are no sacred cows – everything about the platform is under review.

Of course, Netflix will continue to prioritize high-quality content creation, and it will tweak its algorithm for matching members with programming to make it more effective. However, neither of these is expected to make a noticeable difference. The big changes – advertising and an end to password sharing – will determine the future of Netflix stock over the next few years.

If these changes are implemented, and subscribers are willing to view ads and/or pay more to share their accounts with friends and family members, then Netflix is likely to see the sort of strong growth that shareholders have come to expect. If either or both of these initiatives are met with a frosty reception from members, Netflix stock could drop even further.

So, is Netflix stock a buy now that share prices have entered more affordable territory? It’s hard to say. Another quarter or two of information will offer clarity. For now, it is best to wait and monitor Netflix’s progress as it reshapes the original streaming service.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.