In April, Netflix declared that it lost 200,000 subscribers in its first quarter of 2022, leaving many investors and analysts perplexed by the volatile market. After the news, Netflix stock prices fell by more than 35 percent while also affecting competitors like Hotstar, Hulu, etc.
Amidst the unanticipated drop, experts and investors alike are tied between exiting or holding the stocks for now. Few optimistic traders expect the prices to recover soon and even propose buying more stocks.
Whereas the buy ratings from finance analysts have declined to 41 percent, for the first time ever since 2015.
The reasons behind the sudden stock crash are varied and loosely interconnected. Let’s have a look at the major points:
1. Russia-Ukraine War
Commodities prices have shot up significantly due to sanctions imposed on Russia by countries worldwide. Crude oil and petroleum have touched an all-time high post the import ban.
The increase in commodity prices coupled with inflation has made people turn away from subscriptions as they grapple with basic needs.
2. Withdrawal from the Russian Market
Netflix lost 700,000 Russian customers in its withdrawal from the Russian market in its protest against war and the killing of innocent lives. This created a glaring hole in the company’s customer base affecting its valuation globally.
3. Overvaluation during Pandemic
Coming right out of the pandemic, analysts believe that Netflix was overvalued and that the stock crash was not totally unexpected. During the pandemic, Netflix soared as the only source of entertainment was online streaming of movies and series.
Investors poured money into Netflix, confident with witnessing the increase in customers. But as the restrictions opened slowly, people found other avenues of entertainment.
4. Increased Competition from Rivals
Competitors like Hotstar, etc., have the advantage of multi-tier service offerings at reduced prices. Netflix has been strong on its no-ads policy since the start but to its detriment - as that implies a higher price bracket.
Customers are moving to other streaming platforms that offer cheaper plans in exchange for advertisements.
5. Hitting a Growth Impasse
Password sharing is a huge conundrum across streaming platforms. As many as 17 percent of participants in a study accepted using someone else's Netflix account. Accounts moochers have slowed down new customer acquisition resulting in a growth impasse for Netflix.
Future Plans and Possibility for Recovery
1. Cheaper Subscription Plan with Advertisements
Netflix announced following the stock crash that it will move toward allowing adverts while streaming and adding cheaper plans for customers.
2. Crackdown on Password Sharing
Introducing systems that restrict password sharing will benefit in cracking down on freeloaders. This could add new customers as people would be forced to pay for subscriptions.
Investors must know
Management at Netflix estimates two years before it completely implements these solutions to reaccelerate growth. Netflix still owns deep market penetration as it diversifies into alternative mediums like games, self-produced shows, etc., suggesting a positive outcome in the longer future.
From market trends, the prices are expected to remain underweight, and losses could mount for some time. It's a no-buy for new investors. The high-growth opportunities are scant if you are looking for quick returns.
A hold strategy would be ideal for already-invested traders to ride out the depression. The leadership at Netflix is aware of the customer pain points, and with effective measures, in place, the company would recuperate.