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Shares of Netflix closed down more than 35% Wednesday after the streamer reported earnings Tuesday evening that showed it lost subscribers for the first time in more than 10 years. The results and weak outlook led to a wave of downgrades from Wall Street on fears over the company’s long-term growth potential.

The drop caused Netflix to shave more than $50 billion off its market cap. It is now the worst-performing stock of 2022 in the S&P 500, down 62.5% year-to-date.

A number of rival services, including Disney, Warner Bros Discovery and Paramount, often with deeper content libraries to draw on, have also entered the market. Netflix stock, which was already down 40% for the year, has now dropped from $700 in November to $244 when the market opened, a fall approaching two-thirds.

The company said on Tuesday that it had experienced “revenue growth headwinds”. It recently raised subscription prices despite signs that consumer growth was slowing, with a basic monthly package now costing US customers $15.49.

Netflix is bleeding subscribers

The company announced that it had lost a record net 200,000 subscribers during Q1 of 2022, its biggest drop off in over a decade.

“In the near term though, we’re not growing revenue as fast as we’d like,” the company warned in a letter to shareholders. “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. Now, we believe there are four main inter-related factors at work.”

People are sharing passwords

Among these factors listed was the fact that the company estimates that over 100 million additional households (the company currently has 222 million paying subscribers) have access to the streaming service due to passwords being shared.

“Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets – an issue that was obscured by our COVID growth,” Netflix wrote.

The platform is synonymous with the industry, so if Netflix is struggling, that raises questions about streaming as a solid business model.

On Wednesday morning shares for companies that have built much of their businesses around streaming, such as Disney, Roku (ROKU), Warner Bros. Discovery and Paramount, were all down alongside Netflix.

Netflix said Tuesday that it will continue to improve the service. And it remains at the top of a marketplace that is changing how people consume entertainment, so it still has that going for it.

“This is just the reality check that is inevitable for an industry leader facing multiple new entrants to the marketplace,” Shaikh said.

 

 

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by Styliana Charalambous Head of Market Research
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