Netflix's Latest Episode

Netflix has lately had plot twists worthy of a hit series on its platform. 

At last month’s Academy Awards ceremony, with 27 Oscar nominations (and winning for best director), Netflix was king of new media, having vanquished, alongside  Amazon.com and AppleTV+, old Hollywood. 

This evening, Netflix’s crown looked a bit tarnished, after it reported that it lost 200,000 net subscribers in the first quarter from what it had in the fourth, its first such loss in more than a decade.  And the company warned that it could shed another two million subscribers in the current quarter. The stock tumbled 26% in after-hours trading, to $259. At that level, the shares would be down nearly 63% from a November high.

Netflix gave four main factors behind the weaker performance. One was competition: 

Over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched. While our U.S, television viewing share, for example, has been steady to up according to Nielsen, we want to grow that share faster. Higher view share is an indicator of higher satisfaction, which supports higher retention and revenue.

Rich Greenfield of  LightShed Partners told Bloomberg TV that Netflix’s results suggested that a saturated streaming market could be nearing a top. 

And indeed other streaming companies fell in Netflix’s wake in trading after the market close: Walt Disney (down 4.5%), Warner Brothers Discovery (down 3.8%), Paramount Global (down 5.6%), and Roku (down 6%).

To rewrite the script, Netflix CEO Reed Hastings said on the earnings conference call that the company was considering a lower-priced subscription tier that would be supported by advertising. Barron’s Eric Savitz explains: 

That’s a huge change for Netflix. Hastings has long been resistant to offering an ad-supported version of the service. Other services, like Hulu, already offer ad-supported options.

To be sure, there were positives in Netflix’s report. Earnings per share for the quarter topped Wall Street’s consensus. And more important, the company showed that it has now become a cash-generating machine, with $802 million in free cash flow for the first quarter.

“Netflix is becoming a real business,” my Review & Preview colleague, Nicholas Jasinski, slacked me. 

The downside of that is that Netflix will increasingly be valued on a multiple of earnings or another traditional metric. It’s no longer the boom subscriber-growth story.  

“Netflix, which was traditionally evaluated as a technology stock, is now starting to get valued as more of a traditional content provider,” Jon Christian, a founder of technology consulting firm OnPrem, told the New York Times. “Yet they don’t have some of the advantages that some of the other major streaming providers have, like theatrical box office and sports programming.”

As of today's close, Netflix was trading for about 32 times 2022 earnings, compared with nearly 28 times for Disney. While many investors may be currently re-evaluating Netflix, a further decline in its stock price could tempt others for some bargain hunting.  Time to binge watch.