End of an era as Netflix faces stagnation challenges

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Having lost subscribers for the first time in more than a decade, Netflix faces the new challenge of stagnation from a position of strength.

A drop of just 200,000 users -less than 0.1 percent of its total customer base -- was enough to send Wall Street panicking, with shares plunging more than 30 percent.

The loss of subscribers and the company's various plans to revive business "change the historically simple story" of Netflix's solid success, said Wells Fargo analysts, who cut its price target in half.

"The new outlook is clear as mud," they said.

If the Q1 loss of subscribers might seem a blip at first blush, Netflix is signaling otherwise: The company anticipates a much larger drop in its second quarter -- of around two million net subscribers.

"I'm not sure that's a turning point" for Netflix, said Scott Zari of S&P Global Ratings.

"But I think it is indicative of maybe a new phase of slower growth," he said.

Bank of America analysts said in a note that Netflix "made it clear that we can expect very low subscriber growth in '22 and '23 with no margin expansion."

The shift was felt even in the tone of the company's results presentation on Tuesday evening.

The affair focused less on the streamer's mega hits such as "Bridgerton" and "Ozark" and more on combating the 100 million households who watch Netflix for free thanks to shared passwords.

"When we were growing fast, it wasn't the high priority to work on," co-founder Reed Hastings admitted. "And now we're working super hard on it."

Chief operating officer Gregory Peters said Netflix wasn't trying to shut down sharing, "but we're going to ask you to pay a bit more to be able to share."

According to Zari, "future growth will be dependent on how can they monetize those households."

Advertising is coming

To attract viewers, Netflix is preparing cheaper subscriptions with advertising -- which it expects to roll out in the next couple years.

The Los Gatos, California-based company has long defended its noads model, which set it apart from competitors such as Disney+, HBO Max and Apple.