Netflix warning on subscriber growth sends stock plummeting

Netflix warned subscriber growth would slow substantially in the first quarter, sending its stock price down by nearly 20 per cent in late trading on Thursday in the latest instance of investors dumping shares in companies that thrived during the pandemic.

The streaming company projected 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 analyst expectations that also stood at 4m.

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 by roughly a quarter following the report.

John Foley, Peloton co-founder and chief executive, said “rumors 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 below $ 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 on Thursday comes amid broader investor negativity towards companies that benefited from Covid-19.

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 11 per cent since the start of the year. Other pandemic beneficiaries such as e-signature specialist DocuSign and Netflix rival Roku have both tumbled more than 20 per cent this year.

Investors have also soured on the tech sector due to expectations 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 fast-growing companies’ future profits. The tech-heavy Nasdaq Composite index entered correction territory earlier this week, meaning it has fallen more than 10 per cent from its high in November.

Streaming companies like Netflix and Disney + 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 new 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 comes even as it has assembled one of the strongest catalogs of original content since its launch, including the hit show Squid Games and Don’t Look Up, the film that stars Leonardo DiCaprio and Jennifer Lawrence.

The “streaming wars” are leading all of 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 to 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 continues to grow in every country in which its competitors have launched.

Netflix shares sank by 19.6 per cent in after-hours trading.

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