Why Investors Tuned Out Netflix
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.
|Date||Netflix Subscribers||Disney+ Subscribers||HBO & HBO Max Subscribers|
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.
Which Countries Hold the Most U.S. Debt?
Foreign investors hold $7.3 trillion of the national U.S. debt. These holdings declined 6% in 2022 amid a strong U.S. dollar and rising rates.
Which Countries Hold the Most U.S. Debt in 2022?
Today, America owes foreign investors of its national debt $7.3 trillion.
These are in the form of Treasury securities, some of the most liquid assets worldwide. Central banks use them for foreign exchange reserves and private investors flock to them during flights to safety thanks to their perceived low default risk.
Beyond these reasons, foreign investors may buy Treasuries as a store of value. They are often used as collateral during certain international trade transactions, or countries can use them to help manage exchange rate policy. For example, countries may buy Treasuries to protect their currency’s exchange rate from speculation.
In the above graphic, we show the foreign holders of the U.S. national debt using data from the U.S. Department of the Treasury.
Top Foreign Holders of U.S. Debt
With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt.
Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years.
This bond offloading by China is the one way the country can manage the yuan’s exchange rate. This is because if it sells dollars, it can buy the yuan when the currency falls. At the same time, China doesn’t solely use the dollar to manage its currency—it now uses a basket of currencies.
Here are the countries that hold the most U.S. debt:
|Rank||Country||U.S. Treasury Holdings||Share of Total|
|3||🇬🇧 United Kingdom||$655B||8.9%|
|6||🇰🇾 Cayman Islands||$284B||3.9%|
|11||🇭🇰 Hong Kong||$221B||3.0%|
|16||🇸🇦 Saudi Arabia||$120B||1.6%|
|17||🇰🇷 South Korea||$103B||1.4%|
As the above table shows, the United Kingdom is the third highest holder, at over $655 billion in Treasuries. Across Europe, 13 countries are notable holders of these securities, the highest in any region, followed by Asia-Pacific at 11 different holders.
A handful of small nations own a surprising amount of U.S. debt. With a population of 70,000, the Cayman Islands own a towering amount of Treasury bonds to the tune of $284 billion. There are more hedge funds domiciled in the Cayman Islands per capita than any other nation worldwide.
In fact, the four smallest nations in the visualization above—Cayman Islands, Bermuda, Bahamas, and Luxembourg—have a combined population of just 1.2 million people, but own a staggering $741 billion in Treasuries.
Interest Rates and Treasury Market Dynamics
Over 2022, foreign demand for Treasuries sank 6% as higher interest rates and a strong U.S. dollar made owning these bonds less profitable.
This is because rising interest rates on U.S. debt makes the present value of their future income payments lower. Meanwhile, their prices also fall.
As the chart below shows, this drop in demand is a sharp reversal from 2018-2020, when demand jumped as interest rates hovered at historic lows. A similar trend took place in the decade after the 2008-09 financial crisis when U.S. debt holdings effectively tripled from $2 to $6 trillion.
Driving this trend was China’s rapid purchase of Treasuries, which ballooned from $100 billion in 2002 to a peak of $1.3 trillion in 2013. As the country’s exports and output expanded, it sold yuan and bought dollars to help alleviate exchange rate pressure on its currency.
Fast-forward to today, and global interest-rate uncertainty—which in turn can impact national currency valuations and therefore demand for Treasuries—continues to be a factor impacting the future direction of foreign U.S. debt holdings.
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