Why is Netflix stock going down?
Netflix’s stock is in serious trouble.
The stock has fallen from its peak by nearly 70%. Many on Wall Street now question its fundamental value. Despite a strong International business, competition from other streaming services has eroded Netflix’s strong US customer growth track record. Lastly, Netflix has a very arrogant management that has dominated their market for a decade plus. Has the content bubble burst? Or is Netflix just picking the wrong shows? Gone are the days of hit shows like Orange is the New Black and House of Cards.
Moreover, to understand the recent drop in its stock price, it is necessary to introduce why it reached its peak of $690.31 on 10/25/2021.
A lot of stocks became valued differently since the beginning of Covid-19. The very first case reported by the CDC, was on January 20th, 2020 (CDC). At that specific point in time, listed in the graph below, Netflix had a stock price of $353.16 (Yahoo Finance).
As Forbes concluded, COVID-19 led to serious concerns over traditional investment areas.
Such as banks, and after the market showed fears toward traditional investing areas the leading technology companies’ stock prices began to rise (Forbes).
However, this rise has an underlying assumption that all traditional industries would suffer, and it would be hard for them to recover from the pandemic. At the same time, as the FED issued their stimulus plan to boost the economy, all the stocks went through fast growth, including Netflix (Investopedia). As a result, Netflix reached its relatively high price on July 6th, 2022, with 548.73 dollars. It stayed almost a whole year until August 2021 as the economy generally started to recover, as the graph shows below (Yahoo Finance).
However, the Delta variant entered the United States’ territory and experienced significant growth starting July of 2021.
This information was further processed by the market and led to a new wave of price increases for technology and information service stocks that saw their business benefit during Covid.
The market was afraid that a similar crash might happen as in 2020, which again boosted the stock price of Netflix and all Covid-friendly stocks.
Netflix reached its peak on October 25th, 2021, with a closing price of 690.31 dollars, and had been around the same level until November of 2021. Just as every single stock had reached its peak, Netflix’s stock price soon started to suffer from the FED’s change in monetary policies as well as the shrinkage of its fundamental values.
The decrease in the stock value of Netflix is a complex effect of monetary policies, consumer behaviors, and the change in the company’s fundamental values. In terms of monetary policies, the FED increased its degree of tapering on December 15th, 2021, which was meant to combat inflation (Investopedia). This hurt the stock market. Meanwhile, since the inflation rate and CPI were higher than expected, there was also evidence that the Federal interest rate will continue to increase.
The fundamental value of any stock is the sum of the discounted future cash flows – which is dividend yields. However, a company like Netflix is not paying a dividend soon, and the further away the dividends are being yielded, based on the discounting formula, the bigger its impact on the current stock price. Thus, as the Fed’s interest rate is expected to increase, investors are going to decrease the anticipated value of their stocks. This is part of why Netflix’s stock price has dropped from its peak back to the fiscal report date, as shown in the graph illustrated below.
The recent quarterly report sent investors to the exits. Since the release on April 16th, 2022, Netflix decreased all the way from 348.61 dollars to 198.4 dollars.
Which is a 43.09% drop just in 6 trading days.
The reason why this Q1 report has such an impact is that this is the first time that the number of paid subscribers for Netflix has dropped by an amount of 20,000. At the same time, the company anticipated a further drop in the next fiscal quarter which caused a heavier panic for the investors since there are many competitors that appear in the market such as Hulu.
The company also points to password sharing, however consumers engage in password sharing in all streaming platforms? Moreover, this is not something unique to Netflix!
In conclusion, the increase in Netflix’s stock price was not the real increase in its fundamental value; instead, it was an increase that was driven by the market. At the same time, the drop was caused, in part, by the issues in its fundamental value. Thus, the drop in its stock price will not stop at this price unless there is more information coming in to boost its value and give confidence to investors; on the other hand, if the board does make correct decisions, the fundamental value of the Netflix is possible to increase as a result, and further, increase the stock price.
Why is Netflix stock going down? References:
Alpert, Gabe. “U.S. Government COVID-19 Economic Stimulus and Relief.” Investopedia, Investopedia, 12 Apr. 2022, https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723.
“CDC Covid Data Tracker.” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, https://covid.cdc.gov/covid-data-tracker/#trends_dailycases.
Frazier, Liz. “The Coronavirus Crash of 2020, and the Investing Lesson It Taught Us.” Forbes, Forbes Magazine, 14 Apr. 2022, https://www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-the-investing-lesson-it-taught-us/?sh=720bc01546cf.
“Netflix, Inc. (NFLX) Stock Price, News, Quote & History.” Yahoo! Finance, Yahoo!, 27 Apr. 2022, https://finance.yahoo.com/quote/NFLX?p=NFLX.