Netflix (NFLX) shares plunged the most in at least two years Wednesday, pulling the stock back to levels last seen in late 2019, after a surprise exodus in paid subscribers, and a grim near-term outlook, prompted a re-think on advertising sales from the world's biggest online streaming service.
Netflix posted the first decline in annual subscriber growth in more than a decade late Tuesday, losing 200,000 global subscribers over the three months ending in March, significantly missing the Street consensus forecast of a 2.5 million gain and taking the overall total down to 221.64 million.
Around 700,000 of those were the result of cutting its service in Russia, Netflix said, but the bulk of the exodus was put down to rising prices, increasing competition and password sharing, which Netflix estimated at around 100 million households world wide.
Younger viewers are also spreading their entertainment budgets among a growing collection of streaming and on-demand services, according to Benchmark analyst Matthew Harrigan, a fact not helped by Netflix's ongoing price increase and crackdown on password sharing.
"One way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription," CEO Reed Hastings told investors on a conference call late Tuesday.
"But as much I'm a fan of that, I'm a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense," he added. "We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice."
Netflix shares were marked 36.2% lower in late afternoon trading Wednesday trading to change hands at $222.88 each, a move that extends the stock's year-to-date decline to around 63% and pegs its market value at around $98.4 billion.
Other streaming rivals were also marked sharply lower as a result of Netflix's near-term outlook, which it said will include the loss of another 2 million global net paid additions over the three months ending in June, compared to a consensus market forecast of 2.7 million.
Walt Disney (DIS) shares were marked 5.2% lower at $125.05 each, while Comcast (CMCSA) fell 1% to $47.65 each and Paramount Global (PARA) slumped 5% to $34.47 each.
All that said, the group's first quarter earnings were reasonably solid, with a bottom line of $3.53 per share that came in firmly ahead of the Street consensus forecast of $2.89 per share and group revenues that were 10% higher than last year, at $7.87 billion, and just behind analysts' estimates of a $7.93 billion tally.
Netflix said it expects to be free-cash flow positive for the 2022 year and beyond, with first quarter free cash flow rising 15.9% to $802 million.
"We have been flagging in our surveys that gross adds would be a pressure point given market penetration rates and more competition (but) cracking down on password sharing and building an ad-supported service will take time," said KeyBanc Capital Markets analyst Justin Patterson, who carries a 'sector weight' rating on the stock.
"While we agree content quality is better than it was three to five years ago, we also struggle to see where Netflix can improve upon the talent it brought onto the platform the past year," he added. "Netflix management is clearly prioritizing revenue growth for now. Our sense is this likely keeps operating margin constrained near term."
