UPDATED with closing price: Netflix stock, which went into Friday’s Nasdaq session already down 16% in 2022 to date, plunged 22% today alone on waves of selling and disenchantment.
After crawling up from an intraday low of $380 in the opening hour, it finished today at $397.50, its worst closing price since April 2020. Trading volume was almost 20 times normal levels.
The rout followed a fourth-quarter earnings report that disappointed many Wall Street analysts and investors and triggered a larger debate about the outlook for streaming in general. While the company missed its fourth-quarter target for subscribers by just 200,000 (8.3 million additions vs. the expected 8.5 million), its weak guidance for the current quarter set off alarms. During their quarterly earnings interview, top executives could not identify any one cause for the slowdown in subscriber growth, instead reiterating confidence in their overall trajectory. “For now, we are just staying calm,” co-CEO Reed Hastings said.
Analysts, by and large, did not stay calm. Downgrades and downbeat reports from them rained down, and many who opted not to lower their ratings on Netflix did trim their price targets, acknowledging the lackluster vibes. The most notorious bear on the stock, Michael Pachter of Wedbush Securities, issued a note to clients alluding to his long-term (and frequently misplaced) pessimism about Netflix. In the note, titled “Even a Broken Clock is Right Every Ten Years,” he described Thursday’s earnings report and management commentary as a reckoning. “We believe Netflix investors are just beginning to appreciate Netflix’s future status as a low growth, extremely profitable enterprise,” he wrote. “When they fully appreciate this, we expect Netflix’s share price to decline further.”
Michael Nathanson of MoffettNathanson maintained his “neutral” rating on Netflix shares, but dropped his 12-month price target to $375 from $460.
In addition to pointing out the many reasons he believes investors should pump the brakes on Netflix, Nathanson made a broader point for every company racing to pour billions into streaming. Netflix’s swoon came on a day when a lot of red ink spilled in the stock market, especially in the tech and media sectors. Disney, whose valuation has been predicated on its focus on streaming, saw its shares dive 7%. ViacomCBS shares also declined by 7%. Pure-play streaming outlets fared worse. Roku shares fell 9%, as did FuboTV’s. Crackle owner Chicken Soup for the Soul Entertainment dropped 11%.
“For many years, we have walked alone down an empty and dark road asking a simple question of whether streaming is a good business,” Nathanson wrote in a client note. “Many of our clients would say: ‘Of course it is! You damn fool, look at the stock valuation and the massive equity returns that Netflix has generated.’ In fact, along the way, we might have even lost a few clients who were tired of us being wrong on the stock or just too dumb or too stubborn.”
Based on recent trends and the latest financials, Nathanson estimated Netflix could potentially add merely 6 million-11 million net new subscribers in 2022. “This seems shockingly low compared to the average of 26.5 million over the past five years,” he wrote. The analyst did note that he is maintaining a full-year forecast of more than 20 million, pending any more dispiriting disclosures.
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Ben Swinburne of Morgan Stanley downgraded Netflix to “equal-weight,” attaching a price target of $450. In a note to clients, he characterized the stock as overextended, its value based on prior perceptions of the company’s growth. “Engagement is growing, churn is declining, and Netflix clearly has pricing power as evidenced by its recent 10%+ U.S. price increase,” he wrote. “However, bringing that incremental new member to the service is proving more challenging than we anticipated.”
Not all voices on Wall Street joined the negative chorus. Pivotal Research Group’s Jeffrey Wlodarczak slashed some of his projections for Netflix growth and stock, while reaffirming his “buy” rating on its shares. Not only is Netflix still the global leader with nearly 222 million subscribers, he noted, but it has other advantages as the world turns inexorably toward streaming. The company “continues to have a 5+ year head start on its peers with a broad focus across most demographics,” the analyst wrote in a note to clients. It is “poised to continue to be the dominant player globally in the move to streaming (which in our view is in the middle innings) away from traditional pay-TV and we believe there are still significant global subscriber/ARPU growth opportunities.”
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