Wall Street braces for new streaming reality

Analysts are forecasting a difficult year ahead for subscription streaming companies in response to a massive selloff of Netflix shares last week that was prompted by weak subscriber growth forecasts.

Why it matters: Wall Street has grown accustomed to equating paid subscriber growth at major media firms to market value, but Netflix's decline "calls into question the end-state economics of these businesses," wrote Michael Nathanson, a top media analyst, in a note to clients.

Driving the news: Netflix's shares are down more than 20% after the tech giant said Thursday it expects a big drop in paid net subscriber adds for this quarter — one that will nearly halve the number compared with the same quarter last year..

• Shares for rivals like Disney, Roku and AT&T took a hit in response to the news. Other stay-at-home stocks like Peloton and Zoom are also facing steep declines as pandemic isolation dwindles.
• "[T]he reaction that we're seeing in Netflix's shares is appropriate, given what we think is a kind of a reset in expectations for the pace of subscriber growth, post the pandemic," said Raymond James analyst Andrew Marok in an interview with Yahoo News.
• "Stepping back, we see this Netflix quarter as a worrying datapoint for the rest of the streaming industry on multiple fronts," Nathanson added.

The other side: While bearish analysts argue in favor of the selloff, bulls say it was an over-reaction. Some point to Netflix's revenue growth last quarter as a sign that the company's business model remains healthy.

How it works: Streaming companies like Netflix invest billions of dollars every year in content to lure new subscribers and to keep old ones from cancelling.

• The business model implies that streamers will eventually be able to hike prices on consumers, particularly in lucrative markets like North America, as they invest more in premium content, creating a flywheel.
• But Netflix's earnings last week suggested to some that its enormous investment in new content may not be able to drive as many new subscribers as it used to amid increased streaming competition — especially in North America, where subscriber growth is slowing across the board as the market gets saturated.

Be smart: Now that Netflix's subscriber growth has begun to slow, with a total base of around 200 million global paid accounts, investors are trying to determine whether streaming companies may be hitting a ceiling on the size of the total global market.

• Bullish analysts like LightShed Partners' Rich Greenfield argue companies like Netflix and Disney have a long runway ahead, and that the total addressable market globally could be upwards of 600-800 million.
• But skeptics say the opportunity for growth outside of North America lies in developing markets, where streamers will need to drop their subscription prices and introduce mobile-friendly, ad-supported tiers.
• Disney, for example, has seen its average revenue per user continuously decline in response to adding more subscribers to its Hotstar service in India, which is offered at a much lower subscriber cost.

The big picture: Up until now, Netflix has been trading at many multiples higher than its traditional media rivals, despite the fact that it's far less profitable.

• Some analysts see the recent selloff as a normalization of Netflix's value away from the high multiples typically awarded to tech firms that foresee endless vistas of growth.

Go deeper: Subscription streaming growth stalls