Human progress often stirs both optimism and concern, encompassing a variety of topics from plumbing and agriculture to advanced technologies and economic challenges. One standout development of the early 21st century is digital streaming, a transformative technology that has reshaped how we consume media. Viewers now have access to a vast array of digital content, readily available for instant streaming on their TVs or mobile devices, paving the way for the phenomenon known as binge-watching.
The once-dominant cable TV model began to wane as cost-conscious consumers opted to “cut the cord.” Perhaps you were one of them. The appeal was clear:
- Portable, easy access to a wide range of programming.
- Affordability in comparison to traditional cable subscriptions.
Streaming while commuting became a game-changer, marking a high point in media consumption. However, as convenient as it seemed, the quality of much of what streaming services offered was often poor.
Despite this, by early 2021, millions of households had subscriptions to several streaming services, often driven by the occasional standout show amidst a sea of mediocrity.
A Mass Exodus
Netflix (NFLX), a trailblazer in this industry, revolutionized home entertainment first with DVD rentals and then with streaming. At its peak, the company boasted over 222 million subscribers. Subscription models have intrinsic advantages, such as:
- Lower entry costs and multiple pricing tiers to engage customers.
- Recurring revenue that allows for consistent reinvestment in marketing and development.
- Tolerance for higher customer acquisition costs as revenue eventually grows.
However, running a subscription service isn’t a “set it and forget it” scenario. Content can become stale, competition can erode market share, and subscriber turnover can spike. Most importantly, when a mass exodus occurs, it can be disastrous. Investors failed to recognize the impending adjustments in Netflix’s valuation, which led to inevitable reckoning.
On April 20, after a disappointing earnings report, Netflix’s stock plummeted by 35%. Bill Ackman, a notable investor, sold his entire 3 million shares in a single day, incurring a staggering $430 million loss within three months.
This drop was the worst since the previous decline of 24%. With Netflix shares closing at $199.52 on April 28, down from a high of $700.99 less than six months earlier, the company’s market value had evaporated by over $217 billion.
The Ugly Transformation of Netflix
For Netflix investors, subscriber growth has always been paramount, with expectations set unrealistically high—25 million new subscribers annually seemed feasible indefinitely. Yet, as the adage goes, “Trees don’t grow to the sky.” There are inherent limits to growth.
As Netflix matured, claims of perpetual growth became untenable. Initially expecting to gain 2.5 million subscribers in the first quarter, the company instead reported a loss of 200,000—its first decline in more than ten years. Further, projections for the following quarter suggested a global loss of 2 million subscribers. The company’s note to shareholders echoed this sentiment:
“[O]ur relatively high household penetration—considering many households share accounts—coupled with increased competition, poses challenges to revenue growth.”
The staggering decline in Netflix’s stock was a wake-up call that its rapid growth phase may be behind it. It seems unlikely the company will recapture its peak subscriber count. Although it’s clear that Netflix’s era of expansion is over, it remains a significant player in the increasingly crowded streaming market.
However, potential investors should heed caution. Ackman’s previous optimism resulted in substantial financial loss, a lesson in the volatility of investing. Understanding that Netflix is no longer a growth stock is crucial, and it’s not yet positioned as a value stock either.
According to our analyses, the share price may need to decline by an additional 50% before one could consider its transformation complete.
Sincerely,
MN Gordon
for Economic Prism
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