Shares of Netflix closed down more than 35% on Wednesday after the streamer reported earnings Tuesday night that showed it lost subscribers for the first time in more than 10 years. The results and weak outlook led to a wave of downgrades on Wall Street on fears about the company’s long-term growth potential.
The drop caused Netflix to cut more than $50 billion from its market capitalization. It is now the worst-performing stock of 2022 in the S&P 500, down 62.5% year-to-date.
Netflix said several headwinds are affecting growth, including increased competition and the lifting of pandemic restrictions. The video streamer business benefited from coronavirus stay-at-home orders, with more people seeking out digital entertainment. But in recent months, people have been spending less time on digital platforms as vaccines have been rolled out and mandates have been relaxed.
Netflix founder Reed Hastings speaks onstage at the 2019 New York Times Dealbook on November 6, 2019 in New York City.
Michael Cohen | fake images
Slower growth in domestic broadband also factored into the company’s weak forecast. Netflix estimated that 100 million households share their subscription passwords with other family members or friends.
The company, in an effort to fuel growth, said it is considering a lower-priced, ad-supported tier and suggested it will crack down on password sharing. And while analysts generally seemed optimistic about these changes, they noted that it was not a short-term solution to the subscriber base problem.
“Although his plans to re-accelerate growth (limit password sharing and an ad model) have merit, by his own admission they won’t have a noticeable impact until ’24, a long time to wait in what is now a ‘show me the story’,” analysts at Bank of America said in a note on Wednesday. The firm was one of at least nine companies that downgraded Netflix over the disappointing report.
“Following what can only be called a shocking first-quarter subscriber loss and weak financial and subscriber guidance, we lowered our subscriber forecasts and materially delayed our profitability forecasts,” Pivotal analyst Jeffrey Wlodarczak wrote in a note. on Tuesday. The company downgraded the stock to sell from buy.
Wells Fargo analysts wrote in a note Wednesday that they downgraded the stock to the same weight that “negative undergrowth and investments to reaccelerate earnings are the nail in the NFLX narrative coffin, in our view.”
Shares of several streaming services sank Wednesday morning along with Netflix as investors await updates on its growth. Disney shares closed down about 5.5%. Similarly, Roku shares closed down more than 6%, Paramount shares fell 8.6% and Warner Bros. Discovery fell about 6% on the day.
“Gross adds activity remains softer than expected, so subscription companies could experience similar pressures throughout this earnings season, although we do note that NFLX is unique in that it is much more deeply penetrated, particularly when password sharing is taken into account,” said Wolfe Research. in a Tuesday note. The firm maintained its outperforming rating.
—CNBC’s Michael Bloom contributed to this report.