Netflix Shares Crash 35%: Here's Why It Is Losing Subscribers

The pain does not seem to be over as the streaming site is down nearly 1% pre-market on the NYSE

Streaming service provider Netflix closed 35.12% lower at $226.19 on the New York Stock Exchange on Wednesday post subpar results from the company that reported a loss of 200,000 subscribers in the first three months of the year. The huge drop in subscribers were declared as part of its quarterly results, which is the first user decline the company has seen in more than a decade.

Additionally, Netflix forecasted a decline of another 2 million (20 lakh) subscribers in the second quarter. Netflix currently has a paying user base of 222 million (22.2 crore) customers globally.

The rout in Netflix's shares comes despite growth in its financial metrics, where revenue grew 9.8% year-on-year to $7.8 billion, an operating income of $1.9 billion, an operating margin of 25.1% and a net income of $1.59 billion.

However, the commentary by the management paints the future as gloomy.

"In the near term though, we're not growing revenue as fast as we'd like. COVID clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the COVID pull forward", a letter to shareholders states. The stock is considered to be a "pandemic stock", that saw greater revenue when its users were forced to stay indoors due to COVID-19 restrictions, but whose appeal is now fading as its viewers are now stepping out.

Currently, the management attributes this grim outlook and its immediate performance to four reasons:

  1. Factors like cable and satellite TV, data costs, and the adoption of streaming services that are out of Netflix's control. However, the company views them improving over time, and sees a market in all broadband using customers
  2. Alongside the 222 million customers, Netflix estimates 100 million users are using the service by sharing accounts. Thus, this additional 100 million users are using the service, but are not paying for it. Netflix is looking to bring them into the fold.
  3. The competition, like linear TV, as well as Amazon, Hulu and YouTube have seen robust growth
  4. Some macro factors, like the Russia's invasion of Ukraine, inflation, and remnants of disruption from the COVID-19 pandemic

In fact, a large toll on Netflix's paid subscribers came when it pulled out of Russia as a response to the invasion, losing 700,000 subscribers in a short time.

Excluding this, Netflix has gained half a million subscribers.

In US and Canada, Netflix lost 600,000 subscribers, though it saw growth in the Asia-Pacific: Japan, India, the Philippines, Taiwan and Thailand.

To combat this user decline forecast, one of the measures suggested by Reed Hastings, the CEO of Netflix on the earning call, will be to launch a cheaper version of the streaming service that will consist of advertising. He said that he finds advertisements complex, and that he is a fan of the simple subscription model that currently exists, but finds merit in giving those who do not mind watching advertisements the opportunity to pay less.

He said that current ad-free experience will remain, and that the feature will be rolling out in a "year or two".

Find Netflix's quarterly report here.

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