Netflix plans to advertise and targets password sharing as subscriber total shrinks, stock plunges

“It’s pretty clear that it’s working for Hulu, Disney’s doing it, HBO did it. I don’t think we have a lot of doubt that it works,” Hastings said in a video interview with J.P. Morgan analyst Doug Anmuth posted late Tuesday. “All those companies have figured it out. I’m sure we’ll just get in and figure it out as opposed to test it and maybe do it or not do it. I think we’ll really get in.”

Executives also said they expect to crack down on sharing of passwords, with Hastings saying Netflix has been working for two years on a model that would help it bring in revenue for everyone who watches the service. In a letter to shareholders announcing the results Tuesday, executives said they estimate an additional 100 million additional households are using accounts owned by their 222 million subscribers.

For more: Are you sharing a Netflix password? Not for long …

Netflix reported a net loss of 200,000 paid subscribers in the first quarter, while analysts on average were forecasting 2.5 million net additions, according to FactSet, which was what Netflix executives had forecast. The decline arrived after a price increase in the U.S. and Canada, where the company lost 640,000 subscribers, and executives on Tuesday forecast a loss of 2 million subscribers in the current quarter, while analysts were expecting net adds of 2.55 million.

Shares plunged more than 25% in after-hours trading immediately following the release of the results, after closing with a 3.2% increase at $348.61. Netflix ended the session with a market capitalization just shy of $155 billion, suggesting that it could lose nearly $40 billion in valuation if the losses were to hold through Wednesday’s trading session, after losing nearly $50 billion following earnings three months ago.

See also: Netflix stock suffers biggest slide in nearly a decade—’We see few catalysts’

Netflix reported earnings of $1.6 billion, or $3.53 a share, down from $3.75 a share a year ago, when Netflix first revealed its expectations for a severe pullback in new additions after a pandemic-fueled surge in 2020. Netflix revenue improved to $7.87 billion in the quarter from $7.16 billion in the same period a year ago, but missed diminished expectations. Analysts polled by FactSet expected earnings of $2.90 a share on sales of $7.93 billion, estimates that had also fallen in recent weeks.

Netflix’s subscription slowdown after a pandemic surge has only intensified pressure from rival streaming services at Apple Inc.
AAPL,
+1.41%,
Walt Disney Co.
DIS,
+3.23%,
Amazon.com Inc.
AMZN,
+3.49%,
Warner Bros. Discovery
WBD,
+1.37%,
Comcast Corp.
CMCSA,
+2.67%
and Paramount Global
PARA,
+0.86%.
Compounding matters, Netflix is emerging through a dry patch of programming after a back-loaded slate of original movies like “Don’t Look Up” and “Red Notice” and TV series such as “The Witcher” arrived to wrap up 2021.

The subscriber forecast was not the only forecast miss. In a letter to shareholders, Netflix executives said they expect revenue to grow to $8.05 billion from $7.34 billion in the second quarter a year ago, coming up short of analysts’ average estimate of $8.22 billion, though their profit estimate was in line with estimates.

The problem, as executives see it, is the range of new competitors that have arrived in the streaming arena, and the number of customers who are sharing their passwords with potential subscribers who instead use the service for free.

“Our revenue growth has slowed considerably as our results and forecast below show,” Netflix executives wrote. “Streaming is winning over linear, as we predicted, and Netflix titles are very popular globally. However, our relatively high household penetration — when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds.”

Company executives also blamed sluggish economic growth, inflation and geopolitical events such as Russia’s invasion of Ukraine and “some continued disruption from COVID.” Suspension of operations in Russia and “winding-down of all Russian paid memberships” resulted in a loss of 700,000 paid net adds, according to Netflix. Excluding those actions, Netflix would have ended up with paid net additions of 500,000 in the first quarter.

Reversing numbers ultimately comes down to acquiring more subscribers through improved content in TV series, films and — now — gaming, Netflix co-CEO Ted Sarandos said in the video interview. When asked by Anmuth about adding sports content, Sarandos said he was “not so sure” but did not rule it out. Apple, Disney and Amazon have bolstered their streaming services through exclusive pro sports packages with the NFL, MLB and soccer.

Netflix stock declined 37.8% in the first quarter, the worst performance for the stock since it was still being pummeled by the “Qwikster” debacle in 2012. Most of the decline occurred after a disappointing subscription forecast three months ago that wiped out $49.1 billion in market capitalization, though a loss to Apple in the Best Picture category at the Academy Awards in March also hurt — Apple TV+’s “CODA” beat out Netflix’s “The Power of the Dog.”

Read more: After its own Oscars slap and Wall Street smackdown, Netflix searches for a rebound

A major question moving forward is how many billions of dollars Netflix is willing to sink into content to keep pace with its rivals. Access to original content (39%) and a broad array of content (38%) are the top two reasons U.S. consumers subscribe to steaming services, though the same consumers say they’re canceling paid SVOD services because of cost (41%), price increases (30%) and lack of new content (30%), according to Deloitte’s recent Digital Media Trends Survey.

The cascade of disappointing news has punished Netflix shares as much as any company. The stock has collapsed 42% so far this year, while the broader S&P 500 index
SPX,
+1.61%
has edged down 7% in 2022.