“Show me the money!” – what the collapse in Netflix’s share price says about markets today

Netflix's share price has collapsed after it reported its first fall in subscribers in a decade. John Stepek explains what it says about the “build it and they will come” growth-stock business model.

hand pressing the Netflix button on a TV remote control
Netflix: customers are turning off
(Image credit: © Phil Barker/Future Publishing via Getty Images)

Yesterday night (UK time), after US markets had closed, streaming giant Netflix (Nasdaq: NFLX) came out with earnings figures that massively disappointed investors. How massively? The share price dropped 25%.

The big problem is that Netflix reported a fall in subscriber numbers for the first time in a decade. And there’s no sign that things are going to get easier. The share price has now fallen by almost half since peaking in mid-November last year.

There are lots of reasons why the sector is “facing headwinds” as analysts put it, or “in trouble” as normal people might say. In fact, my colleague Rupert is currently working on a more detailed piece about the streaming industry right now.

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But I wanted to take a quick look at what the reaction implies about the overall market “tone” – in other words, how investors are feeling about different types of stocks.

We’ve already noted a number of times that the bubble in “just cross your fingers and believe” stocks burst quite some time ago. That peaked back in February 2021, as a glance at the share price of Cathie Wood’s ARK ETF (which is quite literally a faith-based investment) will demonstrate. Companies with big ideas but no profits and often not even much by way of revenues are no longer popular with investors.

Those were the “longest duration” stocks you could get, and thus very sensitive to shifts in interest rates. (“Duration” is a term normally used in connection with bonds – the longer the duration, the further into the future the cash flows sit, which makes the asset’s value all the more sensitive to interest rate changes).

But it now looks as though the “build it and they will come” model is reaching the end of the line too. There’s far more to this than just the end of the pandemic. That certainly plays a part (is watching TV really your priority now that the sun is out and you might have a hope of going on holiday for the first time in two years?)

But there are deeper forces at play. With interest rates rising and inflation picking up, investors are becoming less patient – they literally can’t afford to be as patient as they were when interest rates were low and falling. As a business, if you can’t provide them with growing revenues, then you’d better provide them with growing profits.

What does that imply? I suspect it means that the likes of Netflix are going to have to concentrate on quality over quantity, on margins over revenue growth. Maybe spending on content will slow, with more going on specific shows. That might be bad news for the TV and film (“content creation”) industry which has enjoyed a boom as streaming services have chucked money at producing more content to attract subscribers.

On top of that, subscribers can expect to be charged more. And not just in this business – across all of those businesses that have been based on “build now, monetise later” models. There are a lot of these companies about. You could argue that this is the basic business model of online grocer Ocado, for example. It was also how Amazon grew to its current scale, although clearly the online behemoth started building an awful lot earlier than anyone else and is in a correspondingly better position now.

As far as the investors are concerned, the building phase is over – now it’s “later”. And woe betide any business that can’t make good on that promise of “monetising” the audience.

Anyway, the point is, growth for growth’s sake is out. Bear that in mind when you’re looking at your portfolio. If there are individual stocks or funds in there which are heavily built on growth without an eye to profitability, it might be time to reconsider.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.