Streaming Wars End in a Share Price Bloodbath.
Netflix. Spotify. Warner Bros. Discovery. Meta. Are Shares Finally in Buying Range?
S&P500 has dropped -13.7% since the high of 4,818.62 on January 4, 2022. The NASDAQ Composite Index is in Bear Market Territory, with losses of -25.17%. However, the plunge in streaming and social media shares are staggering.
Social Media, Streaming and Gaming Companies
May 27, 2022
Why is Netflix One of the Worst Performers?
On April 19, 2022, Netflix announced that instead of adding 2.5 million new subscribers (as they projected on January 20, 2022), the company had lost about 200,000 in the first quarter of 2022. The company stopped streaming in Russia on March 7, 2022. (Russia invaded Ukraine on Feb. 24, 2022.) Without losing Russia, the company would have gained 500,000 subscribers – still two million under the forecast.
It was the first time growth contracted for Netflix in over a decade. The company went on to warn that they could lose another 2 million of their 221.6 million subscribers in 2Q 2022. That would still represent year-over-year growth. However, having two quarters of sequential decline was too much for investors to swallow.
Netflix had already been beaten up in January, when the share price plunged to $360/share from a high of $700 in November of 2021. After the 1Q 2022 earnings release revealed the massive miss on April 19, 2022, spooked investors raced back to the Sell button. By May 11, 2022, the share price had tanked to $160/share.
Why is Netflix losing subscribers? According to Reed Hastings, the co-CEO of Netflix, the competition has heated up, accounting sharing is rampant and the Russian invasion is affecting all of Eastern Europe. Additionally, COVID quarantines had made 2020 the golden year for streaming services. At the November 2021 highs, Netflix’s price-earnings ratio was a very lofty 70. While shares are down 72%, the valuation is more in line with a slower growth company – at a price-earnings ratio of 18.
The Competition is Hot
CODA won the Best Picture Oscar for Apple in 2022. Hulu is the place for reality streaming (Disney). Disney is a century-old brand with some of the most beloved films of all time, including the Star Wars and Pixar brands. The Batman just launched on HBO (Warner Bros. Discovery), where Harry Potter fans hang out. So, what will Netflix’s next hit be? Will their focus on international content creators pay off?
Squid Game (from Korea) was one of the biggest shows in television history with over 1.6 billion hours viewed. The series contributed to an outstanding 4th quarter in 2021 for Netflix. However, the 2nd season isn’t expected to drop until the end of 2023, or later.
In December 2022, Guillermo Del Toro will release his stop-motion film Pinocchio on Netflix. The film’s all-star cast includes Cate Blanchett, Ewan McGregor, Tilda Swinton and Christoph Waltz. Netflix will tease the film on June 15th at the Annecy International Animation Film Festival in France. The Crown is set to return to Netflix in November. It may go head to head with Apple’s Ted Lasso, which is predicted to air around the same time.
Higher Prices, More ARM and/or Advertising?
Many households, including family and friends in different households, share accounts to have the best of all streaming worlds. While all of the streaming providers are keenly aware that content is king, each is trying to squeeze more ARM (average revenue per member) without breaking it. Netflix has been testing various ways to get more revenue from shared accounts. CEO Reed Hastings made it clear that Netflix is also looking at a lower-priced subscription with ads, similar to what Hulu and other streaming services already have.
Affordable Self-Soothing in an Inflationary World
Incidentally, Netflix shares did quite well in the Great Recession. The share price actually increased from $2.96/share in October of 2007 (the top before the recession) to $6.18/share by March 2009 (the bottom before the recovery).
It’s important to remember that not all self-soothing and social media are created equal. Some are paid for by streaming subscribers, while others get their cash from advertising dollars – an industry that implodes in recessions. Advertising budgets are typically the first to go when revenue dries up. All of Meta’s (Facebook, Instagram, WhatsApp) revenue comes from advertising, while none of Netflix’s does (yet).
Are We in a Recession?
During the Pandemic Recession (yes, there was one), people were quarantined and given free money. Streaming services had a golden moment. This time around, money is being siphoned out of the system, and Main Street is burning through savings trying to stay afloat. Federal Reserve Board Chairman Jerome Powell has made it clear that he and his board governors have made “price stability” (inflation) a supreme priority and that getting back to 2% inflation will “include some pain.” In his interview with Kai Ryssdal on May 12, 2022, Powell changed the definition of a soft landing from what it typically is – averting recession – to “keeping the labor market strong.”
We won’t know if the economy is in a recession until July 28, 2022, when the 2Q 2022 GDP growth numbers are released. 1Q 2022 contracted -1.5%.
Streaming Yes. Advertising No.
The 2nd and 3rd quarters are the seasonally weak quarters for Netflix and streaming in general because people are off on vacation with better things to do than sit in front of their screens. So, there could still be more pain in the markets and in this industry, particularly if the 2Q 2022 GDP is negative. However, if I were thinking about buying into weakness in the industry in the early fall (presumably before the Santa Rally), I’d lean toward platforms with strong subscriber revenue, that are not overly reliant on advertising.
Is the Price Right?
A rising tide lifts all ships; a crashing wave drowns them. There may be more market weakness over the summer, which could fall as harshly on this beaten-up sector as the others. Netflix is on my Stock Shopping List, anticipating that late September might bring an even more attractive buying price.
A 2022 recession will be very different from the 2020 Pandemic Recession for streaming services. This time, Disney Plus, Peacock, HBO, Paramount and Apple are all competing with Netflix for subscribers, and gasoline, housing and food are competing with streaming in the family budget. Free cash is not showing up magically in everyone’s bank account. And the recession that could be closer than everyone thinks is unlikely to be the shortest in history, like the Pandemic Recession was.
Netflix is a staple of the streaming diet. But investors and consumers are fickle. Expect both to become more interested once Netflix releases its next blockbuster – particularly if that happens in the fall, after a potentially hellish summer. If you’re interested in a copy of my Netflix Stock Report Card, simply email info@NataliePace.com with Netflix Stock Report Card in the subject line.
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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.