The ‘Great Netflix Correction’ Is Far From Over

Post-the second quarter results, Netflix has become a company of chaos and confusion, for the investors are either overreacting to the numbers or underreacting.

In the second quarter of 2022, Netflix registered a net loss of 970,000 subscribers against a predicted loss of 2,000,000 or two million, thus making many observers wonder if the ‘Great Netflix Correction’ was now over.

In the first quarter of the year, Netflix lost 200,000 subscribers, sending the share price for a toss, but a loss almost five times bigger than that of Q1 ushered in unbelievable optimism amongst the shareholders.

On 19 April 2022, Netflix closed at $198.40, down from $348.61 a week ago, after the Q1 numbers came out. On 20 January 2022, the closing share price was $508.25, which came down to $350-odd a week after the results for the final quarter of 2021 were announced.

On the first Monday of January 2022, Netflix closed at around $600, hit a low of $160-odd, and is now trading at $220-odd. Put simply, Netflix has been hammered like no other stock this year, not Meta, not Alphabet, and not Apple or Microsoft. Yet, at a loss of 970,000 subscribers, with no end to inflation in sight, what exactly are the promoters celebrating when it comes to Netflix?

In the last ten-odd days since the numbers have come out, Netflix’s stock price is up by more than 30 per cent. Thus, a loss of 200,000 subscribers results in a 50 per cent downfall of the stock, but five times bigger loss results in a 30 per cent uptick.

The question then arises if the ‘two million losses predicted in Q2’ was about setting up Netflix for a big and impossible failure, at least on paper, that anything contrary to that would be celebrated as a victory, for the concerns for the company around content spending, debt, franchises, and rival streaming studios remain.

For the next two quarters, the questions are few but significant. Can the company arrest the net loss of subscribers and retain the momentum it gained from the pandemic? Will the ad-supported version, being launched in partnership with Microsoft, solve the pricing problem when it comes to rivals like Apple TV, Disney, HBO in the West, and other local players in the Asian market?

Can the company deliver another hit franchise, as it did in the preceding quarter in the form of Stranger Things, to keep subscribers excited? And finally, is the streaming business without alternate revenue streams, unlike Amazon, Apple, or Disney, a viable investment option?

Netflix has a positive cash flow today of more than a billion dollars, and it is expected to increase to $4 billion by the end of 2023. Still, challenges around content expenditure are being anticipated.

In 2020, Netflix spent around $12 billion on production, but the number increased to around $18 billion for 2021 and 2022. Even as the revenue increases, the competition from players will also increase. Gone are the days when Netflix was expected to capture 600-900 million subscribers globally, thus potential global supremacy can't be banked upon to solve the underlying problems in the long-run.

Earlier this month, Netflix’s $200 million adventure, The Gray Man, came out. While it had the usual thrills and tricks, it doesn’t add much to the library that can retain subscribers for the long haul.

Netflix, for a few years now, has been playing the T20 format while its success lies in the red-ball, the long game. Thus, one ponders if the shareholders, at a net loss of 970,000, are celebrating too early and if the 'Great Netflix Correction' is far from over.

Also Read: Netflix: Too Broke To Be Woke