With earnings season well under way, many big tech companies are posting losses; Amazon reported its first quarterly loss since 2015. But no company is taking the kind of beating that Netflix is taking, contends an article in The New York Times. The company is the worst-performing stock in the S&P 500 this year, and in their earnings call on April 19th executives revealed that they had missed their growth target as well as lost subscribers in this year’s first quarter. After that revelation, Netflix shares fell more than 40%, making the tumble from their November peak more than 70%.
Netflix was particularly well-positioned to do well during the pandemic; the service it provides lends itself well to a lifestyle isolating indoors. And indeed, it began this year with an abundance of optimism, the article maintains, with the biggest TV show of last year (“Squid Game”), two major film releases (“Red Notice” and “Don’t Look Up”), and the most Emmy- and Oscar-nominated TV network and movie studio respectively in 2021. Annual revenue jumped 19% and the company had 222 million subscribers. But in their April letter, it was revealed that those subscribers were sharing their passwords with about 100 million other households, making headwinds to their revenue growth.
Netflix made clear that they are figuring out how to identify and start charging those password free loaders, as well as exploring options to add advertising and charge subscribers more for an ad-free tier. But many analysts believe that Netflix has reached maturity in the American and Canadian markets and that they’re losing the fight against the myriad of other streaming services available. As the company’s growth slows, they’ve also acknowledged that they need to moderate spending in addition to creating revenue. In an effort to curb spending, Netflix hasn’t bought any of its own stock this year, and the company has begun laying off employees.
The real lesson here, the article contends, is that there is inherent risk in investing in a company simply because it’s growing at a fast rate. Eventually, that growth will slow. In the current environment Netflix was particularly vulnerable to getting hit hard by slowing growth. Though it was once exciting to own Netflix stock, those shares have now declined more than 36% while the S&P 500 has returned more than 71%. That makes a boring S&P 500 index fund look like a much safer investment in the long run.