Netflix‘s (NFLX 0.45%) Fate has turned quickly. It thrived at the start of the pandemic as billions of people worldwide sought in-home entertainment while confined indoors. Several entertainment companies entered the streaming industry more aggressively, seeing it as an excellent opportunity.
The combination was bad news for Netflix. Now that billions of vaccine doses have been administered and people are leaving their homes more frequently, the demand for in-home entertainment is falling. Meanwhile, Netflix has to share a smaller pie with more participants. To adjust to the grim circumstances, the streaming giant announced it would lay off 150 workers (out of about 12,000 in total) — or just over 1%.
Netflix cuts costs as growth slows
For the first time in over a decade, Netflix reported a quarterly loss of subscribers. The loss of 200,000 might be small considering it has a total of 222 million subscribers, but it could be the start of a trend in the wrong direction. In fact, management is forecasting a loss of two million subs in the next quarter.
In the conference call following the company’s earnings release on April 19, CFO Spencer Neumann said:
“We discussed in the letter that during this period of slower revenue growth, we will protect our operating margins, roughly in line with what we have forecast for this year. So we’re sticking with our full-year guidance of 22. But for — probably, for the next 18, 24 months, let’s call it the next two years, we’re operating at about that operating margin, which means we’re cutting some of our spending Growth in both content and non-content spend.”
In other words, Netflix will run the business in a way that ensures operating margin doesn’t fall if revenue growth falters. It’s no surprise, then, that it announced this latest round of layoffs involving a total of 150 workers. What could be next on the chopping block is Netflix’s content budget. In the quarter ended March, Netflix spent $3.6 billion on content. To put that number in context, Netflix’s revenue at the same time was $7.9 billion.
It could be an excellent time to buy Netflix stock
Netflix is down a whopping 74% from its peak. The stock trades at a price-to-earnings ratio of 16, nearly its lowest in the last five years. Certainly the competitive landscape has changed for the worse. But Netflix has had competitors before, including its lowest-priced competitor YouTube, which offers tons of ad-supported content for free to viewers.
Additionally, investors have focused solely on the downside of streaming competition. They’ve largely neglected a possible positive outcome from the surge in streaming services. More than ever, consumers may be encouraged to ditch traditional cable subscriptions and switch to streaming. In this scenario, a household could keep multiple streaming subscriptions for a monthly price that’s still lower than the cable bundle. That scenario isn’t priced into the current bleak outlook, reflected in Netflix’s stock price crash.
Still, subscriber and revenue growth is slowing in the near term. That’s the current reality the company is grappling with.