Netflix (NFLX -0.94%) reported first-quarter 2022 results after the market closed on Tuesday, April 19, disappointing investors. The company missed its own guidance on subscriber additions and lost subscribers for the first time in years.
Unsurprisingly, the stock crashed in response to the worse-than-expected report as shareholders reassess their commitment to holding Netflix longer term. Let's look closer at what has Netflix stock down more than 34% on the day following the announcement.
Rising competition and slowing demand lead to subscriber losses at Netflix
In the first quarter ended March 31, Netflix said it lost 200,000 subscribers. That was in stark contrast to management's guidance, which said the company would add 2.5 million subs in the quarter. The guidance was already significantly below Netflix's typical member additions in previous years' Q1, so missing the lower guidance can primarily be blamed for the massive stock price decline following the announcement.
Netflix's most recent quarter also coincided with the Russian invasion of Ukraine. The fallout from those events, including Netflix's decision to cut off Russian accounts, led to additional subscriber losses that otherwise may not have occurred.
At the pandemic's onset, Netflix was a huge winner when hundreds of millions of folks were relegated to entertaining themselves at home. The company gained millions of new subscribers while revenue and cash flow soared. As the pandemic evolved, signs emerged that maybe the company would come out of the event worse than it entered.
The lockdowns of large economies gave competitors an excellent opportunity to launch their own streaming services. Now, world economies are reopening, and consumer demand for streaming content is decreasing, but Netflix is also grappling with a slew of new competitors in the aftermath.
That said, Netflix's shareholder letter that accompanied the earnings release sounded optimistic, saying:
Key to our success has been our ability to create amazing entertainment from all around the world, present it in highly personalized ways, and win more viewing than our competitors. These are Netflix's core strengths and competitive advantages. Together with our strong profitability, we believe we have the foundation from which we can both significantly improve and better monetize our service longer term.
Netflix stock is as cheap as it's been in the last five years
The sell-off has Netflix stock trading at a price-to-sales of 3.5 and a price-to-earnings of 20. According to those metrics, this is the lowest price Netflix has sold for in five years. Of course, some of this price crash can be justified. For nearly a decade, Netflix has been operating with limited competition. Today, almost every major studio has its streaming service, and most are priced below Netflix.
Simultaneously, economies are reopening, and folks cooped up at home for over a year want to get out and experience things outside. Demand for in-home entertainment is falling and is likely to continue in that direction as the world progresses against COVID-19.
That said, Netflix's long-term prospects remain intact. Folks prefer streaming content over traditional cable connections, and the streaming wars are likely to produce more than one winner.