Netflix stock, which enjoyed a brief respite from its January 20 decline after two big investors snapped up a large amount of shares, is down again this week, a combination of fear, looming price increases and analyst reports.
Netflix stock took a double-digit nosedive after it released Q4 earnings after hours on Jan. 20. The next day, shares in the SVOD pioneer dropped 25% to $397.50 each and pundits were claiming that the tide was shifting away from the company that basically invented the subscription streaming video business.
A few days later, on January 27, Netflix shares rose 10% after it was revealed that hedge fund guru William Ackman’s Pershing Square Capital Management said his fund purchased $1 billion in Netflix stock on January 21, boosting confidence in the company once again. Later, on January 31, Netflix founder and co-CEO Reed Hastings said in an Securities and Exchange Commission filing that he bought about $20 million in Netflix stock, which drove the shares up another 11.1% to $427.14 each. The thought was that Netflix stock had weathered the storm, that investors saw the intrinsic value in the company and its business and the stock would return to normal. Netflix shares closed at $457.13 on February 1, up 7% each.
But it didn’t last long. Netflix shares began to slide and by February 2 fell 6% to $429.48 each. By February 4, the stock was down to $410.17, amid growing fears that Netflix had run its course, that despite spending $19 billion on content, releasing some of the most talked-about programming last year -- Squid Games, anyone? -- no one wanted to watch it anymore.
Also: What $19 Billion Gets You: Netflix Previews Entire 2022 Film Slate
Those fears were somewhat founded in reality -- subscriber growth was down despite the release of popular programming -- but what got lost in the panic was that every streaming service was experiencing a growth slowdown. Disney Plus, HBO Max and Peacock all added fewer customers in Q4 than in the past. But Netflix was singled out because it spends the most on content and had been considered to be the unstoppable force of streaming TV.
Shares were down again Monday to $402.10 after Needham & Co. media analyst Laura Martin issued a report claiming that only half of Netflix subscribers were satisfied with the service despite having its strongest content year ever, and 41% say they are more likely to jettison the service this year. Martin surveyed 504 Netflix subscribers in the U.S. (the service has more than 75 million domestic customers) and concluded if the SVOD pioneer wants to stop the bleeding, it has to add an advertising tier, buy an old media library to improve its content ROICs and/or sell out.
“Netflix can NOT win the ‘streaming wars’ given its current strategy, we believe,” Martin wrote.
Shares have slowly inched back up in the past two days -- they closed at $403.53 on February, 8 and were priced at $404.09 on Wednesday afternoon, but they’re still far short of the $508.22 per share benchmark of about two weeks ago.
This could truly be another example of the roller coaster ride that comes with being a Netflix shareholder. The stock has historically had big ups and big downs, usually around subscriber news, and maybe this is no different. But something just feels a little more off this time.
For one, there is a lot more competition on the streaming side than there was just a few years ago. Secondly, everybody is experiencing some kind of subscriber slowdown. Thirdly, all indications are that people are watching more video than they ever have, but if they aren’t watching streamers and are increasingly cutting the pay TV cord, what are they watching, video games?
Or maybe the other explanation is that they are moving toward free ad-supported services like Pluto TV, Tubi and the like. Tubi already predicted that AVOD subscribers will surpass SVOD subscribers later this year. Maybe pricing really is becoming more and more important.
But whatever it is, providers should take notice, because investors are. Disney Plus parent The Walt Disney Co.’s stock was down about 5% between January 20 and February 9 and HBO Max parent AT&T fell 12% in the same timeframe, partly because of the fears around streaming.
While Disney seemed to reverse the slowdown in fiscal Q1 -- adding about 11.8 million Disney Plus subscribers, well ahead of consensus and driving its stock up 5.5% early February 10 -- some analysts pointed to possible weakness ahead.
Fiscal Q1 was helped by new content releases, including the three-part Beatles documentary Get Back, and new programming could help accelerate subscriber growth beyond Q1 levels. But Barclays media analyst Kannan Venkateshwar worried that it may not be enough to get the service back on track to its previous guidance levels. Disney reiterated its guidance of 230 million to 250 million Disney Plus subscribers by 2024.
“Next quarter may be a trough both seasonally as well as in terms of footprint expansion and content releases,” Venkateshwar wrote. “Q3 will see launches in 40 new territories in addition to tailwind from the IPL [Indian Premier League cricket] in India, which should add to growth, but Q4 will likely bear the bulk of the growth load due to release calendar. Given this cadence, the company may not be able to fully get back to its guidance trendline this year despite strong fiscal Q1.”
Attracting the most attention from Martin’s survey is that 41% of respondents said they were “more likely to churn” from Netflix in 2022 because of the price increases. Take that with however big a grain of salt you want -- there’s a huge difference between “I probably will cancel” and “I just cancelled.” But it does cast some shadow on what in the past has been the gold standard for streaming. Martin’s survey also suggests that 70% of respondents say they won’t pay for additional streaming services in 2022, which doesn’t bode well for the remainder of the streamer-verse.
In her report, Martin wrote the “clear learnings” from the survey were: (1) That consumers believe they’ve watched “everything” Netflix had to offer during the pandemic of 2020 and 2021, and there was “nothing” on rival services like Discovery Plus and Peacock. “Better to pay for new services than old,” she wrote; and (2) Netflix still doesn’t offer a lower priced ad-supported tier like most of its competitors, meaning that “consumers that disconnect Netflix can replace it with 2 or 3 different streaming services for an identical monthly fee.”
Martin has been a sharp critic of Netflix in the past, and has called for a lower cost, ad-supported tier ever since Disney Plus came on the scene in 2019 at a $6.99 monthly price point.
Netflix management has been adamant in its resistance to including ads in programming in the past. And maybe all it will take is another popular movie or show or series or whatever to bring people back to the fold. But the fold is a lot different than it was in the past, and most of Netflix’s competition has either raised prices, included an ad-supported tier or both as a result. (FYI, I am leaving Amazon Prime Video, which said it will raise its annual charges by about 32% this year, out of the mix because the vast majority of subscribers pay for the free shipping, not the video.)
HBO Max launched in 2020 at $14.99 per month and last year introduced an ad-supported version at $9.99 per month. NBCUniversal launched Peacock nationwide in July 2020; Paramount Plus launched in 2021 with limited ads for $5 per month; and Discovery Plus launched in 2021 at $4.99 per month with ads.
Netflix has raised prices about 6 times since it launched its streaming video version in 2011 -- in 2014, 2015, 2017, 2019, 2020 and 2022. Each time there was a fear of a massive subscriber exodus that never came. But this time may be different. There are a lot more choices for consumers on the streaming video front.
Netflix co-CEO Reed Hastings has said that he believes Netflix will weather this storm as it always has -- by providing more compelling content. Netflix spends more than any other service on streaming content -- $19 billion this year -- and last week previewed its entire movie slate for 2022. But more shows may not be the answer. Netflix had its most watched show ever -- Squid Games -- in September and still managed to disappoint regarding subscriber growth. And this year it said it expects Q1 subscriber additions to be about 2.5 million, its lowest growth in years. And Q1 is usually one of the company’s biggest growth quarters.
By their very nature surveys are worded in a way to find out what people are going to do, not what they’ve done. And when those questions are put to people while the wounds of a price increase are still fresh, or shortly after they've binge-watched a show and don’t think they’ll ever be anything else to watch, the answers are usually pretty harsh. Wait a week and cooler heads usually prevail.
That could very well be the case here. People are ticked off about another price increase, there are a lot of other lower cost choices around and none of them require long-term contracts, so people can drop them and sign up with abandon. But it does raise questions about streaming, which is turning out to be a lot like its predecessors in the video entertainment business, just trying to figure out the most convenient, cost-efficient way to deliver content to people who want it. Only time will tell who will come up with the formula that satisfies everyone's needs best. ■
