Last week, a group of Netflix shareholders sued the streaming giant in the U.S. District Court for the Northern District of California for their recent loss of subscribers. The lawsuit, which seeks class action status, accuses Netflix executives of misleading shareholders about their ability to continue to grow their subscriber base, reports Reuters. Shareholders want damages for the decrease in Netflix’s share price after the company missed projections for subscriber growth, specifically for investors who traded Netflix shares between October 19, 2021 and April 19, 2022. In addition to naming the company, the lawsuit named Netflix co-CEOs Reed Hastings and Ted Sarandos and CFO Spencer Neumann.
In January, Netflix stock value dropped 20% after revealing its fourth quarter 2021 subscriber numbers, and the valued dropped another 35% in April after the company reported losing 200,000 subscribers during the first quarter of 2022.
Netflix finished 2021 with 221.84 million global streaming paid subscribers, representing net additions of 8.28 million, or 8.9% growth year-over-year. At that time, in the company’s January 20, 2022 shareholder letter, Netflix forecast 224.34 million global streaming paid subscribers at the end of the first quarter, representing 2.5 million net additions, or 8.0% growth.
At the end of the first quarter of 2022, Netflix reported 221.64 million global streaming paid subscribers, representing a loss of about 200,000 subscribers, but year-over-year growth of 6.7%. For the second quarter of 2022, they estimates 219.64 million global streaming paid subscribers, representing a loss of 2 million subscribers, but year-over-year growth of 5.0%.
Reasons for subscriber loss
In their April 19, 2022 shareholder letter, Netflix explained four primary reasons for the subscriber loss.
- Some factors are beyond the company’s control such as the rate of growth for connected homes (via broadband), data costs and the adoption of on-demand entertainment.
- The company has 222 million paying members, but the company believes that Netflix is being shared with an additional 100 million households that are not paying for their service.
- Competition against other streaming services like YouTube, Amazon and Hulu continues to grow, though Netflix retains the highest market share at 6.4%.
- There are global factors that impact growth such as inflation, sluggish economics, the Russian-Ukraine war, and continued uncertainty around COVID. Suspension of service in Russia after their invasion of Ukraine, for example, resulted in the loss of 700,000 subscribers.
“Our revenue growth has slowed considerably as our results and forecast show. Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally,” Netflix told shareholders in the shareholder letter. “However, our relatively high household penetration ‒ when including the large number of households sharing accounts ‒ combined with competition, is creating revenue growth headwinds. The big COVID boost to streaming obscured the picture until recently.”
Netflix stock value
This time last year, Netflix stock traded at $486.69 per share. As of 4:28 p.m. EDT yesterday, it was valued at $173.10 per share, representing at 64.4% loss in the last year.
We aren’t going to speculate on the validity of the shareholders’ case, and we can certainly understand why shareholders are disappointed in the significant losses they’ve sustained over the last year. However, Netflix has been candid in its earnings reports and shareholder letters about slowing growth. It is a multi-faceted issue that reflects the changing global economy, inflation, increased competition, uncertainty regarding COVID, the war in Ukraine and other factors beyond Netflix’s control. The company has a long-term strategy which includes new products and services, an ad-supported tier, and a continued slate of stellar content. Netflix stock will rebound. It is just a question of when.