Why Netflix stocks are falling?

Netflix had a pretty lacklustre start to 2022. Could this signal the end of Netflix’s reign as king of the streaming services?

After successfully navigating the global pandemic, Netflix, the global subscription streaming service, seems to have fallen from grace.

To say it has been a rocky start to 2022 for Netflix would be an understatement, with the streaming giant experiencing a significant plunge in subscriber numbers in its recent Q1 earnings report. Subsequently triggering a 69% share price tumble as a result.

And now, Netflix is looking to bolster revenue, with advertising set to be added to its subscription plans. But what will this mean for investors and subscriber sentiment?

How has Netflix performed in 2022?

Looking back to the first three months of 2022, Netflix lost 200,000 subscribers. This shocked investors, as this was the first time in more than a decade that the streaming giant had a fall in subscriber numbers. And Netflix is expected to continue along this trajectory, with another two million subscribers projected to drop off the platform in the next few months.

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Netflix vs. Disney+

Although there are a number of reasons for this, the most significant is the growing competition, with now highly established companies such as Amazon Prime, AppleTV+, and Disney+ all wanting a slice of streaming action.

Since launching in 2019, Disney+ has continued to demonstrate solid growth and has quickly become Netflix’s biggest rival. It has already amassed over 137 million subscribers, with a total of 210 million subscribers across all Disney streaming services, including HULU and HBO.

Disney continues to outshine Netflix, seeing a 33% increase in subscribers in Q1, a stark difference to Netflix’s decline.

Following its share price collapse over the last year, Netflix’s valuation has also plummeted, with the stock trading at 19 times earnings.

While this valuation mirrors the platform’s slowing growth and current struggles, it does create an opportunity for contrarian investors to jump in at this level.

Why is Netflix introducing ads?

Netflix believes there are more than 100 million households sharing user accounts. This could mean it is sitting at a loss without additional subscribers and revenue. Although the company has been fairly relaxed about that until now, it has been trialing ways to extract more cash out of subscribers – with ads being its go-to choice.

In April 2022, Netflix CEO, Reed Hastings announced that the company would be exploring ad-supported subscription tiers later this year. This could mean introducing cheaper subscription tiers with advertising being added to its content.

A lower-priced subscription model that offers advertising could attract a whole host of new subscribers, and could even keep existing subscribers that were previously ready to switch off.

The advertising model would follow a similar model that has already been adopted by competitor Disney+, who uses it across its HULU and HBO services. However, if the ad-supported streaming is introduced at current price and consumers are asked to pay more within their current subscription to avoid watching ads, this could be catastrophic for the streaming service.

The ad-supported streaming may well boost revenue in the short-term but in order to expand its reach to people who do not interact regularly with Netflix, the streaming platform will have to keep producing attention-grabbing content. That incurs a significant expense that will only continue to increase – and the winner in the streaming game over the next few years will almost certainly be the businesses that are willing to spend it.

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Can Netflix stocks recover?

The sobering reality for Netflix investors is that the streaming giant’s best years could be behind it and that it is no longer sustaining its reliable growth.

Following the poor result in Q1, Netflix’s outlook for Q2 didn’t offer anything that might stem the bleeding, estimating it would lose two million paid subscribers in the coming quarter.

With rising inflation and the cost of living continuing to hurt consumers globally, streaming services are likely to be put on the back burner in favour of necessities, especially given the recent price increases.

So, will this period spell the beginning of the end for Netflix? Although the platform is currently struggling – it is not down and out. If Netflix can successfully merge an advertising model into its subscription plan and generate revenue from the 100 million non-paying users without haemorrhaging existing subscribers, there may still be hope for the company.

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