scorecardresearchSelloff in Netflix shares has 5 key lessons for investors to avoid devastating losses

Selloff in Netflix shares has 5 key lessons for investors to avoid devastating losses

Updated: 21 Apr 2022, 02:00 PM IST
TL;DR.

Netflix lost 2,00,000 subscribers in the first quarter, witnessing the first decline since 2011, and the worst may not be over.

The sharp selloff in the shares of Netflix has surprised many and several rating agencies have downgraded the stock after its first-quarter results and near-term outlook.

The sharp selloff in the shares of Netflix has surprised many and several rating agencies have downgraded the stock after its first-quarter results and near-term outlook.

Shares of Netflix Inc. collapsed 35 percent on April 20 to witness its worst single-day fall since October 2004 after the company said its subscriber base shrank in the first quarter of the current year.

The company has lost $50 billion market cap and the stock is down nearly 40% this year alone.

What happened?

Netflix is world's leading OTT platform and has 221 million subscribers globally. As per CNN Business, the service had expected to add 2.5 million subscribers in the first quarter of this calendar year but ended up losing customers. CNN said Netflix is expected to lose another 2 million subscribers in the current quarter. 7,00,000 of these are expected from Russia as the company has pulled out of the country after its war on Ukraine.

The 2,00,000 subscribers Netflix lost in the first quarter is the first decline since 2011.

The sharp selloff in the shares of Netflix has surprised many and several rating agencies have downgraded the stock after its first-quarter results and near-term outlook. Global investment bank JP Morgan has downrated the stock. It said, “Following a sea change quarter for Netflix in which the company essentially conceded to every key point of the bear thesis, we’re downgrading our recommendation to Neutral & lowering our price target to $300.”

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Netflix share price chart since its IPO. 

Why the fall, though?

Netflix said nearly 100 million, or half of its customers are not paying and sharing passwords with friends and families to log in to the service. Although, Netflix has been saying for quite some time that it intends to stop this practice, analysts are divided over the outcome.

It isn't clear if forcing subscribers to share their passwords will get more customers to buy subscriptions. Or, if Netflix can even successfully dissuade people from sharing passwords.

"Netflix lost about 200,000 customers in the Jan-Mar 2022 quarter They are projected to lose about 2 million (additionally) in the second quarter. This is a classic case of the Inflationary effects on overall consumer spending patterns. With rising costs of goods, it is easier for consumers to give up Netflix. Another reason for the plunge is the rise in bond yields. This has made investors move away from high-value tech and growth stocks," Raj Gandhi, Co-founder and Chief Business Officer, DollarBull, observed.

"Several companies that boomed in the pandemic, quite similar to Netflix, are now suffering deep losses. They include Etsy Inc., Zoom Video Communications, DocuSign Inc. The losses are attributed to the reduction in demand for these online services, now that life for consumers is being restored in the post-pandemic age," added Gandhi.

Key lessons for investors

It was a huge fall in stock and is really significant because of the fact that Netflix is part of FANG (Facebook, Alphabet, Netflix, Google) stocks, a pack that enjoys a high reputation among investors. The sharp fall in Netflix shares teaches us key investing lessons.

The unpredictability factor: Investors tend to believe that the market behaviour can be completely predictable and a stock's movement can be truly anticipated. This belief is highly misplaced. For example, just take a look at the last two year's market performance. When the Covid-19 hit the market, there was a knee-jerk reaction and then the market started to build gains even as uncertainty prevailed. There is always a grey area, a surprise element in the market that can be anticipated but cannot be truly predicted.

Have a stop loss: A 35 percent fall in a single day may teach us many things but the biggest lesson is that you must have a stock loss for a stock. If a stock goes beyond a certain level, sell it and save yourself from a major loss. In India, we have a concept of lower and upper circuits of stocks which stops trading in a stop for some time if it hits circuits. But one can set a stop loss as per her risk appetite. For example, I may decide the stop loss of stock, taking cues from technical indicators or I may decide I will buy or sell a stock if it falls 5 percent.

Review your investments: One of the thumb rules of investing is to invest and keep reviewing your investments periodically so that you can increase or decrease your exposure to that particular asset class. Reviewing your asset also helps in understanding how has your investment been performing so far. If it is not able to meet your goals, you can exit it timely.

Know the trend: Awareness is the key. When you know how the market is moving or how the sentiment for a sector has changed or even how the macroeconomy is going to behave in the near term, you have a fair idea about what to do with your investments. Of late, Netflix had been struggling to increase its subscriber base. An aware investor must be keeping a close eye on the company's updates and commentaries.

"Companies that are operating in growth and innovative space have the ability to generate exponential returns but they are also at risk of major downturns when investor confidence starts dipping in them. Netflix is just another victim of this," said Gandhi.

Learn from your mistakes: Investing is a journey with many successes and failures. It is always better to learn from mistakes and move on. Do not let a loss overwhelm you. Identify what did not work, why you failed and move on. Remember, even Warren Buffett incurs losses in his investments.

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First Published: 21 Apr 2022, 01:08 PM IST