Netflix, diving 36%, wrestles with high penetration, advertising support
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Netflix stock's (NASDAQ:NFLX) overnight trading action is landing hard on the stock Wednesday: It slid 30% out of the market open, its worst drop since 2011.
Shares are suffering even worse nearing midday Wednesday, down 36%. That tumble has shaved more than a staggering $52 billion off Netflix's market cap in just a few hours of trading.
The move comes in response to Netflix's unforeseen drop in net subscribers (of 200,000) - and investors had thought its guidance for just 2.5 million net additions was downbeat.
The company's subscriber story over the past couple of years has generally been an indication of significantly slowing domestic growth, buoyed by more impressive gains overseas. But last quarter's decline was geographically broad: Along with a drop of 640,000 subs in the U.S./Canada (UCAN) market, Netflix lost about 300,000 in EMEA and another 350,000 in Latin America. (Asia Pacific was the bright spot, adding a net 1.09 million subscribers to pare the losses.)
Excluding the suspension of service in Russia, the company would have gained about 500,000 net subscribers, though that's small consolation today.
A few key themes are emerging from reactions to the downbeat results. One is the prospect that the decline in subs is a "hit the wall" moment, suggesting that the addressable market for streaming might be far smaller than foreseen.
Netflix (NFLX) co-founder Reed Hastings has famously spoken for years dismissing rising competition, suggesting an ever-expanding pie for a rapidly growing streaming video industry. Now, the company is acknowledging the effects of high penetration, particularly when it comes to password sharing that has Netflix suggesting 100 million households are watching without paying (vs. its 221.6 million paying members).
While several metrics have rebounded from the impact of the COVID-19 pandemic, customer acquisition hasn't bounced back. What is the company doing about that beyond creating great content? "It shouldn't be any more complicated than that," co-CEO and content chief Ted Sarandos says, adding that engagement is the key amid rising competition.
"While we were not happy with the top-line subscriber growth, we definitely saw that the new season of Ozark,
Inventing Anna, The Adam Project and certainly, the biggest of them all, the new season of Bridgerton, delivered exactly as expected - actually a little bit bigger than expected with fans," Sarandos said.
"Now of course, we think we've got to do that, and we have to have an Adam Project and a Bridgerton every month and to make sure that that's the expectation of the service constantly," he says.
The other key takeaway from Netflix's executive-interview earnings call was the growing certainty that Netflix will work to turn around growth by producing an ad-supported tier, after longtime resistance. Hastings now suggests an ad plan would phase in over a couple of years, as a separate layer to the service.
That would make Netflix the latest and most notable in a rapidly growing wave of services moving that way. Disney (DIS) said last month that it would roll out an ad-supported tier on Disney+ in 2022, a key step toward hitting its ambitious subscriber goals. HBO Max (WBD) is seeing growing interest in its ad-supported version. Amazon.com (AMZN) has recently recommitted to its free ad-supported TV offering, renaming it from IMDb TV to Freevee. And rivals like Peacock (CMCSA) and Hulu (DIS) (CMCSA) already notably backed low-priced ad-supported models.
Some key advertising technology names are rising alongside the likelihood that ads are coming to streaming's giant, depending on their connected TV exposure. The Trade Desk (TTD) is +4.5%: Magnite (MGNI) is +7.3%. Other names are somewhat lower: AppLovin (APP) -6%; PubMatic (PUBM) -1.5%; Digital Turbine (APPS) -2.5%; ironSource (IS) -3.9%.
All was pretty grim around the results and call - given multiple challenges in market penetration, hot competition, the dim macroeconomic environment, password sharing - but if you're looking for the bright side, it comes with a content slate that once again is loaded to the back end of the year.
Content investments take time to cycle through as movies and series get made, and the second half of 2022 and into 2023 look like they could be even stronger for Netflix than the second half of 2021.
Investors clearly have the size of the streaming market in the front of their mind, as Netflix's results had a damper effect on streaming rivals.