Netflix Is in Trouble and Losing Subscribers, Not Going Out of Business

Netflix will release its second-quarter earnings on July 19 after the markets close. The stock slumped following its earnings for the first quarter of 2022 and shed over $50 billion of its market cap after it reported a loss in subscribers. Is Netflix in trouble? It lost subscribers after a decade of strong growth.

Netflix will kickstart the FAANG earnings season, which has historically been the case. The once formidable FAANG pack has also looked vulnerable in 2022. While Netflix is the worst performing S&P 500 stock, Meta Platforms is also among the bottom 10. That isn't the kind of price action that investors expect from the constituents of the coveted group.

You don't need to be a financial wizard to realize that with a YTD loss of almost 70 percent, Netflix is in trouble. One can blame all the noise from the sell-off in growth stocks, the Fed’s rate hikes, rising inflation, and pessimism towards stay-at-home stocks for the crash. These factors are leading to the sell-off in Netflix but the company has other challenges too.

In the first quarter of 2022, Netflix lost 200,000 subscribers. It was the first time in a decade that the company lost subscribers. During the quarter, Netflix lost 700,000 subscribers in Russia after it exited the country following its invasion of Ukraine.

While the company did add half a million subscribers, excluding the losses in Russia, it missed its guidance of 2.5 million and also lost 640,000 subscribers in North America. It also forecasted a loss of 2 million subscribers in the second quarter of 2022. Netflix will release its earnings on July 19. Analysts will be laser-focused on the subscriber count as well as the guidance for the back half of the year.

There are multiple reasons why Netflix is losing subscribers. First, the company admitted that it saw a demand-pull forward during the pandemic lockdowns. Second, it talked about reaching saturation in some markets and also blamed higher competition. Netflix also said that around 100 million people globally watch its content through shared passwords.

Some other factors are also leading to subscriber loss at Netflix. Amid soaring inflation, consumers have been looking to lower their discretionary expenses, which include either giving up their streaming subscription or downtrading with cheaper alternatives. Netflix raised its prices in the U.S. earlier in 2022.

Netflix’s content hasn't struck the right chord with users in emerging markets like India. Despite lowering the price, the company hasn’t been able to win over the price-sensitive Indian audience. Finally, a lot of people seem to be canceling Netflix subscriptions after binge-watching their favorite shows.

Netflix has canceled several shows and has laid off employees. The cancellations and layoffs combined with the crash in Netflix stock have left many wondering whether the company is going out of business.

However, Netflix isn't going out of business anytime in the foreseeable future. The company’s debt position is manageable. Netflix had a net debt of $8.6 billion at the end of March, which is comfortable given its market cap. The trailing leverage multiple of 1.3x also doesn't look high. Netflix is a profitable business and had 222 million global paying subscribers at the end of March.

These metrics show that the company isn't about to go out of business. There are concerns about plateauing growth, but the company is taking measures to revive the growth.

Netflix has partnered with Microsoft for its ad-supported tier. The lower-priced tier could help it increase its subscriber base, especially in emerging markets. Also, it's looking at ways to crack down on the menace of shared passwords. The company has added gaming on the platform and is looking at ways to capitalize on the popularity of Squid Games, including a rumored second season.

None of these measures will pay off immediately though. Given the streaming competition and the high base effect where Netflix is near peak penetration in some markets, it might need to pull out something extraordinary to revive its sagging growth.