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Why Investors Tuned Out Netflix

Netflix shares have enjoyed an incredible run over the past decade. Subscriber growth seemed limitless, profitability was improving, and the pandemic gave us a compelling case for watching TV at home.

Things took a drastic turn on April 19, 2022, when Netflix announced its Q1 results. Rather than gaining subscribers as forecasted, the company lost 200,000. This was the first decline in over a decade, and investors rushed to pull their money out.

So, is there a buying opportunity now that Netflix shares are trading at multi-year lows? To help you decide, we’ve provided further context around this historic crash.

Netflix Shares Fall Flat

Over the span of a few months, Netflix shares have erased roughly four years worth of gains. Not all of these losses are due to the drop in subscribers, however.

Prior to the Q1 earnings announcement, Netflix had lost most of its pandemic-related gains. This was primarily due to rising interest rates and people spending less time at home. Still, analysts expected Netflix to add 2.7 million subscribers.

After announcing it had lost 200,000 subscribers instead, the stock quickly fell below $200 (the first time since late 2017). YTD performance (as of April 29, 2022) is an abysmal -67%.

What’s to Blame?

Netflix pointed to three culprits for its loss in subscribers:

• The suspension of its services in Russia
• Increasing competition
• Account sharing

Let’s focus on the latter two, starting with competition. The following table compares the number of subscribers between Netflix and two prominent rivals: Disney+ and HBO.

Disney+ was launched in November 2019, while HBO Max was launched in May 2020. HBO (the channel) and HBO Max subscribers are rolled up as one.

Based on this data, Netflix may be starting to feel the heat of competition. A loss in subscribers is bad news, but it’s even worse when competitors report growth over the same time period.

Keep in mind that we’re only talking about a single quarter, and not a long-term trend. It’s too early to say whether Netflix is actually losing ground, though the company has warned it could shed another 2 million subscribers by July.

Next is account sharing, which according to Netflix, amounts to 100 million non-paying households. This is spread out across the entire world, but if we use the company’s U.S. pricing as a benchmark, it translates to between $1 to $2 billion in lost revenue.

Growth is Everything

In the tech sector, growth is everything. If Netflix can’t return to posting consecutive quarters of subscriber growth, it could be many years before the stock returns to its previous high.

“We’ve definitely seen that once you get to 70, 80 millions of subs, things really tend to slow down. We saw it with HBO, and we’ve seen the same issues with Disney. They’re hitting the upper limit on the big growth.”
– David Campo, NYU

Regaining that momentum is going to be difficult, but Netflix does have plans. To address password sharing, the service may charge a fee for out-of-household profiles that are added to an account. The specifics around enforcement are vague, but Netflix is also considering a lower-priced subscription plan that includes advertising.

Only time will tell if these strategies can stop the bleeding, or perhaps even boost profitability. Rampant inflation, which might persuade consumers to cut down on their subscriptions, could be a source of additional headwinds.

Visualizing The World’s Largest Economies (1970-2020)

Global GDP has grown massively over the last 50 years, but not all countries experienced this economic growth equally.

In 1970, the world’s nominal GDP was just $3.4 trillion. Fast forward a few decades and it had reached $85.3 trillion by 2020. And thanks to shifting dynamics, such as industrialization and the rise and fall of political regimes, the world’s largest economies driving this global growth have changed over time.

This slideshow using graphics from Ruben Berge Mathisen show the distribution of global GDP among countries in 1970, 1995, and 2020.

Methodology

Using data from the United Nations, Mathisen collected nominal GDP in U.S. dollars for each country. He then determined each country’s GDP as a share of global GDP and sized each graphic’s bubbles accordingly.

The bubbles were placed according to country latitude and longitude coordinates, but Mathisen programmed the bubbles so that they wouldn’t overlap with each other. For this reason, some countries are slightly displaced from their exact locations on a map.

1970: USSR as a Major Player

In 1970, the U.S. accounted for the largest share of global GDP, making up nearly one-third of the world economy. The table below shows the top 10 economies in 1970.

Then a global superpower, the former Union of Soviet Socialist Republics (USSR) came in second place on the list of the world’s largest economies.

In the years leading up to 1970, the USSR had seen impressive GDP growth largely due to adopting Western technologies that increased productivity. However, the USSR’s economy began to stagnate in the ‘70s, and eventually collapsed in 1991.

On the other side, Germany (including both West and East Germany) was the third-largest economy in 1970 after rising from economic ruin following World War II. West Germany’s “Economic Miracle” is largely credited to the introduction of a new currency to replace the Riechsmark, large tax cuts brought in to spur investment, and the removal of price controls.

1995: Japan Begins to Slow Down

By 1995, the U.S. still held the top spot on the world’s largest economies list, but the country’s share of global GDP had shrunk.

Meanwhile, Japan had leapfrogged into second place and nearly tripled its share of the global economy compared to 1970. A number of factors played into Japan’s economic success:

• Large business groups known as keiretsu used their connections to undercut rivals
• Fierce competition between companies encouraged innovation
• Tax breaks and cheap credit stimulated investment
• The well-educated workforce was willing to work extremely long hours

But around 1990, the country’s economy had actually begun to slow down. Japan’s decreasing labor force participation rate and diminishing returns from higher education both could have played a role.

2020: The World’s Largest Economies Shift Again

In 2020, the United States continued to hold onto the number one spot among the world’s largest economies. However, Japan’s slowdown created a rare opportunity for a new powerhouse to emerge: China.

China’s economy saw incredible growth following economic reforms in 1978. The reforms encouraged the formation of private businesses, liberalized foreign trade and investment, relaxed state control over some prices, and invested in industrial production and the education of its workforce. With profit incentives introduced to private businesses, productivity increased.

China was also positioned as a cheap manufacturing hub for multinational corporations. Since rising into contention, the country has become the world’s largest exporter.

India held the title of the sixth largest economy in 2020. Similar to China, the country’s growth came from relaxed economic restrictions, and it has seen particularly strong growth within the service sector, including telecommunications, IT, and software.

With dynamics shifting, which countries will be on the leaderboard in another 25 years?