Netflix warning on subscriber growth sends stock plummeting

Netflix has warned that subscriber growth would slow substantially in early 2022, sending its stock tumbling more than 20 per cent on Friday in the latest instance of investors dumping shares in companies that have thrived during the pandemic.

The streaming company projected after the close of trade on Thursday that it would add just 2.5m subscribers in the first three months of this year, far fewer than the 4m it added in the first quarter of 2021 and well below analysts’ expectations that also stood at 4m.

Netflix shares dropped 24 per cent in early trading on the Nasdaq, wiping about $55bn from the group’s market value. The Nasdaq 100 stock index was down about 1 per cent, while Europe’s Stoxx 600 tech index was down 2.4 per cent.

Netflix’s disappointing forecast came as Peloton was forced to rush out preliminary second-quarter earnings to shore up investor confidence after CNBC reported the company was temporarily halting production of its connected fitness products. Shares in Peloton, one of the biggest beneficiaries of early Covid-19 lockdowns, fell about a quarter following the report on Thursday, but had pared losses slightly in a 4 per cent rebound on Friday.

John Foley, Peloton’s co-founder and chief executive, said “rumours that we are halting all production of bikes and [treadmills] are false” but conceded the company was “right-sizing our production . . . as we evolve to more seasonal demand curves”. Peloton’s market value has plummeted in the past 12 months to about $8bn from $50bn.

Netflix and Peloton were among a clutch of “stay at home” stocks that investors snapped up at various stages of the pandemic, and the sharp decline in their share prices came amid growing investor angst over shares in companies that benefited from the pandemic.

BlackRock’s “virtual work and life” ETF, which was launched during the first wave of the virus to track companies that would prosper from people spending more time at home, is trading close to a record low. It is down 9 per cent since the start of the year and more than 40 per cent below the peak it hit last year.

Shares in Zoom, the videoconferencing service that became ubiquitous as people worked from home, have fallen more than 15 per cent since the start of the year, including a 3 per cent drop on Friday morning. Other pandemic beneficiaries such as e-signature specialist DocuSign and Netflix rival Roku have tumbled more than 20 per cent in 2022.

Investors have also soured on the tech sector in anticipation that the Federal Reserve will raise interest rates more quickly than previously expected to tame soaring inflation. Higher rates reduce the value investors place on future profits of fast-growing companies. The tech-heavy Nasdaq Composite index entered correction territory this week, meaning it has fallen more than 10 per cent from its high in November.

Streaming companies such as Netflix and Disney Plus hoovered up huge numbers of subscribers during the 2020 lockdowns, but a return to more normal routines has hit growth just as they are spending billions of dollars on content to attract and keep viewers.

Netflix also undershot expectations for net new subscribers in the last quarter of 2021, adding 8.3m versus expectations ranging from 8.4m to 8.7m. That brought the total number of paying customers to 222m.

The slowdown in Netflix subscriber growth came even as it has assembled one of the strongest catalogues of original content since its launch, including the Korean hit drama Squid Game and Don’t Look Up, a film starring Leonardo DiCaprio and Jennifer Lawrence.

The streaming wars are leading the big services to spend more on content. Netflix said the amount it was spending had compressed operating margins to 8 per cent in the fourth quarter of 2021 — down 6 percentage points compared with a year earlier. However, Netflix did not spend as much on content as it had forecast.

Netflix noted that “competition . . . has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering”.

The company acknowledged that the increased rivalry “may be affecting our marginal growth” but said it continued to grow in every country in which its competitors had launched.