The Netflix (NASDAQ:NFLX) share price dropped by more than 25% overnight in after-hours trading after the streaming service said that it had lost subscribers for the first time in more than a decade.
It lost 200,000 members in the first quarter of the year, and the company forecast a further drop of 2m subscribers in the second quarter.
Slowing growth alert
Sales growth slowed considerably in the first three months of the year. The company reckons it’s down to a few main factors. In addition to the 222m paying households, it estimates there are over 100m more that use the service by sharing accounts. That makes it harder to grow in many countries.
Another key factor is competition. In the past three years in particular, many new streaming services have made Netflix less of a unique proposition. TV subscribers now have several options from some of the world’s largest tech giants. That includes the likes of Amazon, Apple, and Youtube owner Alphabet.
In recent months, Netflix also lost 700,000 subscribers by suspending its service in Russia as a result of the conflict with Ukraine.
Lastly, the company cites a slowing economy as another factor for sluggish growth. I reckon this point could impact many companies over the coming months. If consumers are having to spend more money on rising energy bills and food prices, some expenses might need to be cut. Netflix has shown that TV subscriptions are in the firing line.
Overcoming setbacks
What I’d like to know is if it can overcome these setbacks.
Since the days of competing with Blockbuster 20 years ago, Netflix has continued to make improvements to its content and viewing experience. It’s not planning on stepping back any time soon. I expect to see more quality content and big hits over the coming years.
Sharing passwords across multiple households is currently permitted but might not be allowed in the future. Netflix has been testing ways to monetise sharing and it could be a source of additional sales in the coming years.
Overall, despite slowing growth, Netflix is still a profitable and cash-generative business. It’s also a high-quality and global operation that benefits from a 20% profit margin. It has demonstrated several levers that it can pull to manage its way through near-term setbacks. That said, it’s more of an issue of what price I should pay for slowing growth.
Has the Netflix share price fallen too far?
The sharp drop in the Netflix share price could offer some opportunities for short-term traders. I wouldn’t be surprised to see a near-term bounce over the coming weeks. But as a long-term investor looking to buy into strong and growing businesses, I think I’ll wait.
A slowing economy could continue to hurt consumer discretionary businesses like Netflix this year. That, combined with rising competition, is a recipe for disappointment, in my opinion. I won’t be buying the shares today.
