A surprise twist has hit the investment world as one of the pioneers of online streaming sees a rapid decline in investor sentiment.
The COVID-19 crisis offered a unique boost to many businesses, Netflix included, as lockdowns and work-from-home policies kept people indoors, creating an ideal climate for the streaming giant. However, the landscape in this year has shifted dramatically in a direction nobody anticipated.
Netflix saw only a 9.8% increase in revenue in the year's first quarter and experienced a loss of 200,000 subscribers. The decision to discontinue its service in Russia led to a 700,000 subscriber drop, which was partially offset by a 500,000 subscriber gain in other regions.
Investors have reacted harshly to these changes, further exacerbated by forecasts of a 2 million customer drop in the second quarter.
Reed Hastings, Co-CEO of Netflix, pointed out several contributing factors, including stiff competition from other streaming services. Other macro-economic influences, such as slow economic growth, rising inflation, geopolitical events including Russia's invasion of Ukraine, and ongoing disruption from COVID-19, have created a challenging operational atmosphere for Netflix.
Netflix aims to turn the tide by converting an estimated 100 million global households who share passwords into full-fledged subscribers.
Even if a portion of these password-sharing viewers become paying customers, this could give Netflix a substantial short-term revenue increase. However, the plan could backfire, potentially pushing some viewers away to seek more budget-friendly competitor services.
Despite facing a challenging phase, Netflix still has vast potential. The streaming giant may be nearing saturation in the U.S., but ample expansion opportunities exist globally. Its current 222 million subscribers are a mere fraction of the roughly 700 million households worldwide with internet connectivity.
At this juncture, one could argue that Netflix is a value buy. The firm's price-to-earnings (P/E) ratio stood at 16.5 on June 23, significantly lower than its 10-year average P/E of 182. This valuation even undercuts the S&P 500's P/E of 20.3.