Netflix slumps as muted forecasts, Hastings exit deepen growth worries

Netflix founder and CEO Reed Hastings smiles during an interview in Barcelona, Spain, Feb. 28, 2017. (AP Photo/Manu Fernandez, File)

Netflix shares fell more than 10 per cent in early trading on Friday, as investors digested a tepid forecast and the surprise exit of co-founder and Chairman Reed Hastings amid worries over the streaming pioneer’s next growth driver.

The company has been broadening its strategy beyond its traditional subscription model as growth moderates and competition intensifies, leaning more heavily on advertising, live programming and price increases to lift revenue per user.

Earlier this year, Netflix abandoned a high-profile bid to acquire Warner Bros Discovery, exiting what could have been a transformative deal in exchange for a US$2.8 billion termination fee.

“Netflix’s next challenge will be to truly diversify away from having subscriptions account for almost the entirety of its revenue,” said Ross Benes, analyst at EMarketer.

“Ad business is growing but not at the rate marketers expected more than four years ago when the ad tier was launched. As the company enters a new era without Reed Hastings, advertising will play a bigger role.”

Hastings’ eventual exit had been broadly expected after he stepped down as co-CEO in 2023, handing day-to-day operations to Ted Sarandos and Greg Peters. Still, the announcement came at a sensitive moment for the company, analysts said.

With subscriber growth hitting a ceiling in mature markets, analysts say price hikes could help offset the slowdown, but not for long.

“Generating higher revenue per user will be the biggest key to keeping growth high, and we don’t think the firm has the ability to continue raising prices at recent rates each year,” said Matthew Dolgin, an analyst at Morningstar. “But it doesn’t happen in a vacuum.”

Dolgin said some advertising gains could come from customers shifting from premium plans to ad-supported tiers, meaning revenue growth may not be fully additive.

If losses hold, more than $44 billion is set to be wiped out of the company’s market value on Friday.

Shares have fallen more than 18% since early December, when Netflix first submitted the bid for Warner Bros Discovery. They have rebounded around 21% through Thursday close after the deal was scrapped in late February.

“Despite stronger near-term pricing, the absence of a full-year guidance raise likely disappointed the market, and reduces visibility on any meaningful acceleration into 2027,” said Parth Talsania, CEO of Equisights Research.

Netflix on Thursday beat first-quarter revenue and profit expectations but forecast earnings per share for the current quarter below analysts’ estimates, warning revenue growth would slow to its weakest pace in a year, according to LSEG data.

“Investors went into earnings with a high bar that Netflix didn’t quite clear,” said William Blair analyst Ralph Schackart. “There was nothing thesis-changing in the quarter.”

Raymond James analysts said strong gains in the stock ahead of earnings had left little room for disappointment.

(Reporting by Kritika Lamba and Kanchana Chakravarty in Bengaluru; Additional reporting by Samuel Indyk in London; Editing by Mrigank Dhaniwala and Sriraj Kalluvila)