Netflix’s Cratering Stock Drags Down Its Rivals Too
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In the early 2010s, CNBC’s Jim Cramer coined the “FANG” acronym, anointing a new class of tech powerhouses — Facebook (now Meta), Amazon, Netflix and Google — that Wall Street would be compelled to follow.
But on Wednesday, the day after the streamer disclosed it had lost subscribers for the first time in a decade — and forecasted losses in the millions during the second quarter — Netflix’s reputation as a top-performing stock appeared to shatter. The company’s shares tumbled more than 35 percent, and schadenfreude ensued in some entertainment industry corners, with I-told-you-so’s on offer from executives who’d expressed skepticism of the streamer’s seemingly limitless potential for growth.
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But the Netflix hangover is also overhanging other big entertainment and streaming stocks. Competitors like Disney, Warner Bros. Discovery, Paramount and Roku all dropped between 5 and 8 percent at market close on Wednesday.
“Until proven otherwise, the growth slowdown at Netflix combined with a lower long-term margin outlook is a negative read for its streaming competitors at Walt Disney, Warner Bros. Discovery, Paramount, NBCUniversal (Comcast) and Starz (Lionsgate),” Morgan Stanley analyst Ben Swinburne wrote on Wednesday. “We anticipate strong net adds quarters across Disney+, Paramount+ and HBO Max, respectively, in the first quarter, but these businesses are years behind Netflix in scaling to profitability.”
The problems Netflix is facing head-on are shared across all subscription streamers, though as the largest major service, and the one with the most expectations, Netflix appears to be taking the heat first.
Subscriber churn has impacted revenue growth, and aspects of Netflix’s distribution model — for instance: releasing episodes all at once for binge-watching, rather than sticking to a weekly release schedule — could be revisited to remind subscribers why they are and should continue to keep paying for the service.
“Netflix’s business model presents a structural flaw that actually encourages its subscribers to churn out when finances are stretched,” Wedbush analyst Michael Pachter wrote in his Wednesday report. “By dumping all episodes of a new season at once, Netflix subscribers are able to binge the entire season and churn out till next year.”
Netflix has increased prices across its tiers, but now the most popular plan, standard ($15.49 a month), is now the most expensive compared to rivals like Disney+ and HBO Max. Netflix execs defended the price hikes in an April 19 earnings call, with COO Gregory Peters noting, “We’re also working hard to ensure that we have a range of price points across a set of plans with different features.”
Pachter noted that while “wealthy subscribers will have no problems maintaining four to five streaming subscriptions,” those who are below the median income will struggle to continue paying for three different services, exacerbating the churn Netflix faced in the most recent quarter when it lost 200,000 subscribers — most coming from the U.S./Canada region.
Netflix’s 180-degree turn on advertising, which comes as Disney+ prepares to roll out its own ad-supported subscription tier later this year, also portends the end of the limitless growth potential of the subscription video on-demand space.
Though other rival services have found success with ad-supported offerings, Lightshed Partners analyst Rich Greenfield is less optimistic about the overall impact on streaming. “It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience,” Greenfield said in a recent report.
But Greenfield added that SVOD is “certainly nowhere near as profitable as the legacy businesses that streaming is replacing.” That, in itself, the analyst added, is “not an encouraging sign for investors in the sector.”
