What happened
Shares of Netflix (NFLX -0.63%) continued to drop this morning as the leading streamer is still feeling the consequences of a disastrous earnings report last week. The first-quarter update included a surprise loss of 200,000 subscribers, and the company said it expected to lose another 2 million paying members in the second quarter.
Negative reports in a number of popular financial media outlets over the weekend helped the drag the stock lower today.
As of 11:43 a.m. ET, the stock was down 3.1%.
Image source: Netflix.
So what
Articles in Barron's, Bloomberg, and The Wall Street Journal portrayed a company in disarray following the crash in the stock.
A Bloomberg story said that employee morale is at its lowest point in at least several years. The company had long enjoyed something of a bulletproof image on Hollywood and on Wall Street, but that seems to have shattered in the wake of the earnings report. Employees are also dejected after seeing stock options evaporate that were valued in the hundreds of thousands of dollars for some.
Management now seems to scrambling to adjust its strategy, planning to rein in content costs and focus on quality over quantity. That move seems to be a long time coming, as Netflix's content budget is expected to clock in around $18 billion, far more than any of its competitors. With competition on the rise, the company needs to be more judicious with its spending.
Now what
Netflix stock has now lost about 40% since the earnings report and is off roughly 70% from its peak last November. While the company does need to make some changes, it's a mistake to think that Netflix is a broken company.
Co-CEO Reed Hastings has proven himself to be a visionary thinker in video entertainment, and the company's 220 million subscribers give it an advantage over the streaming debutantes. The company still has plenty of levers to pull to improve its performance, including launching an advertising tier, but being more scrupulous about content costs is probably the best first step it can make.
