If Netflix Continues This Trend, the Stock Could Continue to Drop

After Netflix (NFLX 1.74%) reported first-quarter 2022 earnings, the stock got hammered and lost 35% in a single day. This reaction was primarily due to losing 200,000 subscribers in the quarter and guiding for another 2 million to be lost in the second quarter. Without subscriber growth, Netflix loses its luster as an investment.

What is to blame for Netflix's subscriber loss?

There are many reasons why Netflix has lost subscribers. First, Netflix lost 700,000 clients due to suspending service in Russia in retaliation for its actions in Ukraine. Without this headwind, Netflix would have grown subscribers for the quarter. However, I believe this statement is misleading. Netflix lost 640,000 and 350,000 subscribers in UCAN (U.S. and Canada) and Latin America, respectively. These regions have nothing to do with the Russia-Ukraine war, so Netflix is experiencing some other troubles in these locations.

Image source: Netflix.

When it comes to subscription services, there are two primary reasons consumers cancel: Pricing or content. Unfortunately for investors, Netflix may have a problem with both. From 2016 to 2021, Netflix's spending on content nearly tripled.

Image source: Statista.

However, Netflix didn't just eat these costs. It passed them on to the consumer by increasing its subscription prices.

Data source: The Verge, data by Netflix. Standard pricing includes two screens with HD streaming quality.

With the subscription cost rising 55% in just over six years, consumers have likely reached a breaking point and feel the cost is no longer worth the content.

Even though Netflix has spent a lot on content, it doesn't mean that content is quality. With nearly every major studio's launch of streaming services, Netflix has lost access to many movies and shows. In its place, Netflix has had to backfill space with second-rate content or produce originals (which some would argue is second-rate content). While it rotates many titles through its service, much of Netflix's content has been on the platform for years. As for the original content, Netflix seems to be favoring a quantity-over-quality approach and relying on a few hit series a year (like Tiger King or Squid Game) to keep subscribers around.

Image source: Getty Images.

With new streaming services popping up, consumers may be canceling to check out what other services have to offer. For example, HBO Max grew its subscribers from 73.8 million to 76.8 million in the first quarter. HBO has been producing quality content for years, and now that Netflix is more expensive than the ad-free version of HBO Max, consumers may be switching their services. 

Is there anything Netflix can do to save itself?

Co-CEO and founder Reed Hastings has historically been against an ad-supported Netflix tier. However, in Netflix's Q1 conference call, he appears to have changed his tone and now favors an ad-supported offering. In addition, a cheaper version of Netflix with ads may entice some viewers to come back, which would combat its falling subscriber count.

One thing that certainly won't help Netflix is its decision to crack down on password sharing. As this directive gets rolled out, some subscribers may cancel, further causing Netflix to lose viewers. On the other hand, if it can keep most of its password-sharing users (100 million of its 222 million households password share, per Netflix) by charging a few bucks extra per month, Netflix will likely count them as individual subscribers, which will boost numbers. However, they won't be paying the full price, so revenue growth won't be as impressive as if they were independent subscribers.

Netflix has been spending heavily on content but to no avail. While I don't think Netflix is doomed, I believe there are much better investments. It has upset its core customer base with price hikes and poor content. I don't see any upside for Netflix with new streaming choices available.