Why Are Netflix Shares Down 30% in 2022?

Why Are Netflix Shares Down 30% in 2022?

Netflix (NASDAQ: NFLX) shares have fallen 30% year-to-date, continuing the downward trend seen in much of the tech sector. Notably, Netflix is down 37% from its all-time high in November 2021. Two main events have contributed to this decline: a broader loss of investor confidence in growth stocks amid rising interest rates and a disappointing earnings report from the company.

1. Slowing Subscriber Growth

Netflix’s Q4 2021 earnings report, released two weeks ago, revealed that the pace of subscriber growth is slowing. This news spooked investors, who had been expecting the streaming giant to continue expanding its subscriber base at a rapid pace. Before this drop, Netflix had a price-to-earnings (PE) ratio of around 60. With its current share price at US $429.48, the PE ratio has now dropped to about 38.0.

2. Tougher Competition in Streaming

In a surprising move, Netflix admitted that competition is taking a toll on its subscriber growth. Over the past few years, Netflix has faced increasing competition from other streaming platforms, including Apple TV+, Disney+, Peacock, HBO Max, and Paramount+. Among these, HBO Max has been the fastest-growing service, adding 73.8 million subscribers in 2021—outpacing Netflix’s growth.

Furthermore, older services like Amazon Prime have significantly ramped up their content investment. Amazon Prime increased its content spending by 41%, reaching US $11 billion in 2020, and recently made an US $8.5 billion bid for MGM studios, securing access to its vast content library.

3. Rising Prices and Consumer Retention

2022 is shaping up to be a crucial year for streaming services. As prices rise, consumers might begin to reconsider their subscriptions. Netflix has already raised its standard subscription price to US $15.50 per month, making it more expensive than some of its competitors, including HBO Max.

If other streaming platforms, like Disney+, decide to raise prices as well (especially considering Disney+ may hike its prices before June due to unsustainable pricing), Netflix could be in a stronger position. However, if content quality remains the primary factor in consumer decisions, Netflix is well-positioned due to its continued dominance in content creation. In 2021, Netflix hosted 14 of the top 15 most popular TV shows and movies, a key differentiator in an increasingly crowded market.

Outlook for 2022

If streaming services’ prices become more balanced, the battle will likely shift to content quality. Given Netflix’s strong content library, it could rebound if it continues to attract and retain viewers. However, 2022 may be a pivotal year, and much will depend on the competitive dynamics in the streaming space.