Netflix stock tanks: Here’s what you need to know

After the stock market closed on 20th January this year, Netflix updated the market on earnings and revenues covering the fourth quarter of 2021. The streaming giant beat the consensus forecast on both metrics. But the stock price plummeted over 20% in ‘After Hours’ trading, wiping off a fifth of the company’s value. And there’s been no recovery so far.

David Morrison, Senior Market Analyst at Trade Nation, said: “In fact, Netflix stock is down 45% from the high of $700 hit just eight weeks ago. Both declines are extraordinary. After all, Netflix is not a ‘penny stock’. It may not be in the Big Tech top tier with Apple, Microsoft, Alphabet, Amazon, Tesla, and Meta (formerly Facebook), but it is certainly a major corporation, which, before the slump was in the top 20 US stocks by market capitalisation. Even after this collapse it’s the 47th biggest company in the US.

“So, what triggered this extraordinary sell-off? Quite simply it was the company’s forward guidance, or forecast, for future subscriber numbers. In the first quarter of last year, Netflix picked up 3.98 million new subscribers. The company now forecasts subscriber growth of 2.5 million for the first quarter of this year. That’s a big drop in growth. But does it really mean that the market had got it so wrong in its valuation of the company? It’s still beating expectations on earnings and revenues, and in early 2021 weren’t we still dealing with Covid restrictions which gave Netflix’s subscriber numbers a boost?

“And hasn’t it come out with some incredibly popular programmes? All observations are true. But the savage market reaction tells us something about growth stocks, particularly those that tie themselves to the ‘tech mast’. Bear in mind that these were the companies that soared following the pandemic sell-off in March 2020. These companies thrive on low interest rates, a loose monetary environment as well as all the fiscal stimulus doled out by the government in response to Covid, putting spending money in people’s pockets. For growth stocks, it’s all jam today, as they borrow cheaply for future gains and take advantage of the scalability that tech gives them.

“But now things are changing. Inflation is taking a large chunk out of consumers’ pockets. It’s also forcing the Federal Reserve to raise interest rates and reduce stimulus. The very tailwind that saw companies like Netflix lead the stock market higher, are now headwinds. Not only that, but investors are getting increasingly worried about the streaming business.

“The drop-off in subscriber numbers for Netflix could be interpreted as a positive for its rivals, as customers switch from one to another. But Disney, ViacomCBS, Discovery, and Roku also fell on the news. The worry is that subscriber growth has peaked for streaming companies and adding to this concern is the fact that Netflix has been unable to pin down a reason for the slowdown. If this becomes a feature, it will be another and potentially bigger headwind for Netflix and the rest of the sector.”