Why is this decline occurring? What steps will the company take to address the situation? How does the international context relate to the reality of a company like Netflix?
In this article, we spoke with Alejandro Salmon, an economist and financial advisor, and Diego Russo, Chief Information Security Officer at Plan Ceibal—both of whom are faculty members at ORT’s School of Business and Social Sciences —to gain a better understanding of the situation facing one of the world’s most recognizable brands.
After Netflix reported a sharp drop in subscribers, its stock plummeted by 35%.
Why does Netflix release these figures? What happens between Netflix’s announcement and the actual drop in its stock price?
Companies listed on U.S. stock exchanges must comply with strict transparency standards, including the quarterly disclosure of their financial results.
On April 19, Netflix released its quarterly earnings report: revenue was in line with expectations (USD 7.9 billion), and earnings per share significantly exceeded forecasts (USD 3.53 reported vs. USD 2.89 expected). But for companies like Netflix, one of the most important metrics is subscriber growth, and the reported figure was unexpectedly poor. An increase of 2.5 million accounts was expected, but the report showed a decline of 200,000.
Investors are always eagerly awaiting the release of this information, and in the case of Netflix—a company known for consistently delivering high subscriber growth rates—the results fell far short of expectations.
This is the first time in more than 10 years that its subscriber base has declined. In highly efficient markets such as U.S. stock exchanges, once a company’s earnings are released, this information is immediately reflected in the stock price.
According to analysts, the stock market decline is due to more than one factor. Are these situations typically caused by multiple factors? Is there any single factor that stands out as the most significant?
That's right, absolutely correct. A company's valuation depends on a variety of factors.
Investors typically analyze three key dimensions to determine a company’s fair value based on its “fundamentals,” in an analysis that ranges from macro to micro factors—a process commonly referred to as top-down analysis. In the case of Netflix, at this moment, these three dimensions are creating what could be called a perfect storm.
First, the macroeconomic environment is far from favorable. High inflation resulting from the pandemic and the Russia-Ukraine conflict is forcing central banks to take restrictive measures, such as raising interest rates, which is causing financial asset prices to fall across the board—and stocks are no exception.
This is clearly evident in the stock prices of the so-called FAANG group—comprising Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet)—all of which have fallen by 10% or more over the past month.
Second, the streaming industry is undergoing a period of consolidation, during which major traditional media players such as Disney, HBO, and Warner Bros. are aggressively investing in competitive subscription plans and business models, which is impacting Netflix’s margins and ability to compete.
Third, and finally, the individual analysis of Netflix, which, as we mentioned earlier, shows a decline in the number of subscriptions and uncertainty about its future performance—and if there’s one thing investors really don’t like, it’s uncertainty. All of this is reflected in the drop in Netflix’s stock price.
How do companies typically handle these situations? What steps are likely to be taken?
Companies should not focus on their stock price as a strategic measure; instead, they should focus on their business plan and their commercial and competitive strategy. If things go well, that will naturally be reflected in the stock price.
In any case, such sharp drops in stock prices can trigger drastic measures by majority shareholders who are unhappy with the losses their investments are incurring. Keep in mind that Netflix’s market value plummeted by approximately $60 billion in just two days (to put this drop into perspective: that’s roughly Uruguay’s annual GDP).
Changes to the firm's board of directors or management may be necessary. In fact, competitors in the industry may view Netflix's decline in market capitalization as an opportunity to acquire the company.
According to analysts, rising inflation is leading many users to cancel their subscriptions, since streaming is not a necessity. How might this affect the streaming services industry? How can it be addressed?
Inflation has a direct impact on people's purchasing power. As purchasing power declines, families cut back on spending, and streaming—which is not a necessity—is not immune to these cuts.
Furthermore, another significant factor is that we are emerging from a pandemic that led to widespread lockdowns around the world, during which Netflix—along with Zoom and other similar platforms—became the stars of the show, reaping extraordinary profits. That situation was a one-off, temporary phenomenon, and we are now seeing a return to normalcy with more moderate consumption in the streaming sector.
Retaining customers requires a great deal of innovation, high-quality content, and a mix of competitive products and prices.
Including ads on the platform is a strategy Netflix plans to implement. Will it help alleviate the situation, or is it not enough?
Netflix announced a potential change to its subscription model, under which it would begin offering an additional service—one that is more affordable and supported by advertisements—in addition to its standard offering. Other competitors have already been using this model for some time.
This marks a shift from the company’s long-standing model—one that has always prided itself on being ad-free—and shows that it needs to explore different options to remain a leader in an increasingly competitive and mature industry. However, whether or not this will be enough to offset the loss of subscribers remains to be seen.
Netflix also announced that it is working on ways to prevent a single subscription from being used by multiple households. The company estimates that there are approximately 100 million users of shared accounts. Until recently, Netflix claimed that addressing this issue was not a priority, but today, given this new reality, allowing subscribers to share their accounts is a luxury Netflix can no longer afford.
What are the prospects for these types of platforms in the stock market?
Streaming platforms have grown significantly in recent years and still have room to gain a foothold in some global markets where penetration rates are not as high.
As is often the case in other industries, a period of rapid growth is typically followed by a period of consolidation, during which competition intensifies and growth rates slow down.
The key to remaining industry leaders and setting the standard in these cases lies in consistently investing in innovation and research, staying closely attuned to customers’ needs, focusing on the user experience, creating compelling content, and identifying the most profitable business models.
Netflix was a major disruptor in its day, upending the video rental industry and leading to the demise of companies like Blockbuster. Now, it’s time to reinvent itself.
In such a fast-paced and ever-changing world, success is fleeting; what worked and was a key to success today will no longer be so tomorrow, and neither Netflix nor any other tech company is immune to this reality.