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The share price of Netflix crashed 35 per cent on Wednesday and 4 per cent more on Thursday after the over-the-top (famously OTT) platform provider revealed that it had lost 200,000 subscribers in the first quarter of calendar year 2022, well short of its modest predictions of adding 2.5 million subscribers. The markets’ sharp reaction to this news is a sign of how quickly disappointment can set in on highly valued stocks, and the potential damage if their performance stumbles.
Netflix was once a favourite of the markets; when Covid hit the world, its stock zoomed to a high of $700.99 by November 2021 from $325 at the start of 2020 as work-from-home gained acceptance, folks were locked into their homes and more and more people subscribed to the OTT platform. It was part of the sought after FAANG stocks, with Indian AMCs even launching funds dedicated to the theme.
Short squeezing
Some analysts had then cautioned that the stock price rise was not matching fundamentals of Netflix. According to them, the rally was prompted by a group of smart retail traders — Robinhood investors — who pushed the share price sky-high to squeeze short-sellers. The stock is now at the receiving end and the bubble has burst.
Veteran investor Bill Ackman has liquidated his $1.1 billion bet on Netflix with a loss of more than $400 million, as the share price fell sharply on Wednesday. He had entered the stock only in January, after the stock slumped from its peak. If investors like Ackman can get caught off-guard, one can imagine the plight of retail investors.
Nevertheless, the roller-coaster ride of Netflix has provided an important lesson for them.
Ackman’s actions show that stock price falls may not always offer buying opportunities. Sometimes, you may have overestimated a stock’s potential in market euphoria. A whopping 65–70 per cent of the stocks that crashed by more than 50 per cent in 2008 haven’t recovered in the last 10 years.
Betting on theme?
Investors should also be aware of the risks involved in a thematic stock. Most of these stocks attract investors betting on some ‘wild’ assumption. For instance, there was a perception that prospects of DTH, OTT and digital media companies will explode as the whole world is shifting to digital media in a big way. However, acute competition and regulatory issues can affect performance.
If a company’s stock is not performing according to expectations, it is prudent to exit the stock and deploy the funds elsewhere.
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