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Netflix "Killed" Netflix | Monetization · Major Event

A storm of plunging U.S. tech stocks has arrived, and the Netflix myth has been shattered. Building trust takes time, but it only takes one disastrous piece of data to reignite the nightmare of a tech bubble.

On April 19, local time, Netflix released its earnings report, revealing that the company lost 200,000 subscribers in the first quarter of this year—the first decline in subscriber numbers since 2011. The company also warned that it expects to lose an additional 2 million subscribers in the second quarter.

In the 24 hours following the earnings release, Netflix first plunged 25% in after-hours trading, and then, on the second trading day, its stock fell an additional 35%, wiping out $50 billion in market value in an instant.

Over the following month, Netflix's market capitalization continued to plunge. As of May 25, its stock had lost 70% year-to-date, trading at $187, erasing all gains from the past four years.

The pandemic has dealt a severe blow to the global economy. In response to inflation, with the Federal Reserve implementing "epic interest-rate hikes and balance-sheet reduction," U.S. tech stocks—closely tied to liquidity—have naturally become among the hardest hit. Beyond Netflix, Microsoft, Amazon, and Meta are also facing wave after wave of trust crises.

For a long time, Netflix has consistently fueled investors' boundless optimism, boasting a loyal following.

In the U.S. stock market, the five mobile‑internet giants—Facebook, Apple, Amazon, Netflix, and Google—form the "FAANG" club. Over the decade from 2009 to 2018, their combined profits grew sixfold, and their weighting in the S&P 500 rose from 3% to 9%, helping sustain the market's prolonged bull run.

No other country has staked as much of its wealth on the stock market as the United States, yet during market downturns, sophisticated financial mechanisms can devolve into a game driven by expectations.

Netflix's "believers" know that growth will inevitably hit a wall; it's just that no one wants to admit the game of musical chairs will stop at their turn.With the once‑sacred faith in tech stocks now fading, is the next tech bubble still far off?

01. Expected Game

On the morning of April 20, Zhang Jiaxin was scanning the news when she came across the latest quarterly financial results from Netflix. As a seasoned investor in U.S. tech stocks, her initial assessment was that, from an operational standpoint, with the exception of subscriber numbers, metrics such as revenue and profit were "all fairly solid."

But to her surprise, when trading opened that day, Netflix plunged sharply, posting a cumulative drop of 35%, dragging down streaming giant Spotify by 10% and Paramount by 8.6%. "Among U.S. tech stocks, such a steep one-day decline is rare—especially given Netflix's size."

Although no company can grow indefinitely, for a firm like Netflix—whose success has come to embody the industry's faith—their sudden collapse is bound to spark profound self-doubt among investors.Everyone is asking, "What's going on?" Among the many speculations, the prevailing consensus is that "losing 200,000 subscribers" was the root cause, shattering the market's expectations for Netflix's continued growth.

Zhang Jiaxin's post‑mortem analysis concludes: "U.S. internet stocks have been rising for a long time. Many investors may have already recognized that valuations were high, but they didn't anticipate that, after a while, valuations would climb even higher." When this trend persists for an extended period, the market tends to develop an irrational mindset, assuming that "the valuation anchor of these companies should keep moving upward."

According to research previously conducted by Zhang Jiaxin, "no one—whether an analyst or an individual investor—would suddenly forecast a decline in Netflix's subscriber base next month."

An U.S. stock investor told 36Kr that, beyond the broader market environment, Netflix's previously high share price was also underpinned by "short-term biases"—for example, after a hit series like "Squid Game" takes off, both user numbers and the stock price tend to surge in the short term. "However, relying on blockbuster hits to make 'linear extrapolations' reflects a misjudgment by the market about the company."

"Linear extrapolation" refers to a situation in which, on a graph with time plotted on the horizontal axis, the change of a phenomenon approximates a straight line, enabling the analysis of processes that evolve over time at a constant rate of growth. Simply put, it means that the phenomenon increases steadily and continuously as time progresses.

Under an optimistic outlook, everything is naturally subjected to "linear extrapolation," which is why, in the eyes of many investors, Netflix's inflection point seems to have arrived "out of nowhere."

"What a pity—I once devoted myself wholeheartedly to this culture." After this major setback, one Netflix investor felt a sense of crisis—both in terms of his investments and on a personal, emotional level.

The crisis has also hit hedge fund giants.

On January 26, Bill Ackman, founder of Pershing Square, tweeted that he had purchased 3.1 million shares of Netflix within a few days, making him one of the top 20 largest shareholders. Just a few days earlier, on the 21st, Netflix had fallen by 22%, prompting Bill Ackman and other investors to believe it was an opportune time to "buy the dip."

But it wasn't until three months later that they realized the bottom was still far from being reached.

On the night of April 20 alone, Bill Ackman lost more than $400 million on Netflix. Hastily pivoting, he announced his exit from the Netflix investment just three months after placing his bet. Both he and Pershing Square ended up among the biggest losers among Netflix investors.

Bill Ackman cited as his reason for exiting that, due to the concentration of his position, he required exceptionally predictable prospects from the companies he invested in. However, Netflix's volatile operating performance had rendered it impossible for him to make reliable forecasts, prompting him to liquidate his holdings.

On the day Netflix's stock plummeted, Chen Da, a U.S. equity investor with ten years of experience, retweeted this remark, saying:Diversification—make sure to diversify; there's not that much predictability.

Since its IPO in 2002, Netflix's stock has delivered steady growth over two decades, earning it a reputation for success in the public markets. As a leading tech company in the cultural and entertainment space, Netflix has come to serve as a benchmark—everything associated with the company is viewed as positive and forward‑looking.

However, in the background, Netflix's long-standing growth trajectory and a relatively favorable market environment have amplified the positive narrative, while negative voices have correspondingly faded—often to the point of silence.

This clearly benefits a stock's performance in the secondary market, but from the outset, the company's business model has remained unchanged, and doubts about Netflix have long persisted: Is Netflix ultimately a technology company or a television company?

Benedict Evans is a top VC analyst in Silicon Valley. In August 2019, he published an article,He pointed out that at the time, discussions about Netflix invariably focused on issues facing the television industry—such as how many series and films were being produced, what budgets were involved, or what would happen if a lead actor decided to leave. Benedict Evans argued that these were Los Angeles– or New York–style problems, not "Silicon Valley–style" ones.

In 2016, at the height of Netflix's growth, Chen Da already voiced skepticism about this "growth stock" on a forum.

Despite Netflix's subscriber base growing year after year, its financial reports show that the company's operating cash flow has been negative since 2014—and has continued to widen.Meanwhile, the company's profits remain positive year after year because cash outflows associated with content‑production costs are not recognized as expenses on the income statement; instead, they are capitalized as "content assets" and amortized annually.

Chen Da analyzes that the cash flow statement reveals how much Netflix spends on content each quarter. Data show that by 2016, its annual spending had already reached $6 billion, and it has nearly doubled every two years.

Money spent on content is money spent on acquiring users. Over the past decade, Netflix's subscriber base has grown steadily—there's no other explanation than its relentless, ongoing investment in content.

By spreading content‑related costs across each user, Chen Da found that Netflix's cost of acquiring a single subscriber has been steadily rising. This aligns with the iron law of internet‑company expansion: when economies of scale have yet to materialize, the marginal returns from burning cash to scale diminish over time.

02. Endless War

Following the April 20th market crash, Netflix's stock price fell below $300. Zhang Jiaxin observed that market discourse at that point shifted to "buying the dip." "In a prolonged bull market like the U.S. equity market, investors tend to view today's pullback as a 'golden pit,' figuring that prices will eventually rebound anyway."

An investor who had not yet established a position beforehand is convinced that Netflix's business model is sound and that the 200,000‑subscriber decline is only temporary. However, in terms of valuation, the stock still appears overpriced. The investor plans to build a position when the PE ratio settles around 20, following a sustained pullback. Currently, Netflix's share price stands at just $187, with the PE ratio now at 17.

However, the best days for U.S. stocks are behind us, and the market has entered a downtrend, with scrutiny of companies becoming increasingly stringent.

In response to shareholder pressure, Netflix began devising a series of remedial measures. On May 11—20 days after the earnings debacle—the company informed its employees that it planned to launch a lower‑priced, ad‑supported subscription tier by year's end; however, on the same day, its stock price fell another 6.5%.

Zhang Jiaxin believes that "advertising" has failed to deliver certainty to market expectations, and after the sharp plunge, the shift in strategy will require time for the market to rebuild trust. "Moreover, the advertising market is also weak, so it may not be enough to offset the revenue shortfall."

Netflix has broken its years-long policy of operating without ads, making it hard to tell whether this move was driven by competition or part of a long‑term strategy. What's clear, however, is that Netflix has once again joined the race to expand its subscriber base, alongside Disney+, Apple TV, HBO, and others.

Hong Jiajun has long tracked the overseas TMT sector at Industrial Securities. He believes that going forward, Netflix's share of the pure subscription video market will continue to face pressure from platforms such as Disney and HBO, adding, "Right now, the situation is far from stable."

In its latest earnings report, Disney+ added 7.9 million paid subscribers quarter over quarter, surpassing expectations by 76%. As of now, Disney+ has a total of 138 million subscribers, closing in on Netflix's 220 million.

Several new entrants have pushed market supply into oversupply, forcing a price war. Meanwhile, the encroachment of these new competitors on Netflix's subscriber base is far from over, leaving Netflix unable to raise prices lightly.

Currently, under U.S. regional pricing, Netflix's Standard plan at $15.49 per month is the most expensive, compared to Disney+ at $7.99 per month, Hulu's ad-free tier at $12.99 per month, and HBO Max at $14.99 per month.

"The core contradiction remains unresolved, and the pool of willing payers is limited. Until we reach a stage where market share stabilizes at an equilibrium, no one will readily raise prices, making the advertising business a crucial area to explore," said Hong Jiajun.

One phenomenon is that, during market booms, Netflix's "subscription model" has been the most widely praised; today, it is also the very model that draws the harshest criticism.

"Once market sentiment shifts, interpretations of the same event can undergo a dramatic transformation—this is a hallmark of the secondary market.", Zhang Jiaxin said.

An U.S. stock investor told 36Kr that an effective business model is always stage‑specific. "Overseas, they don't engage in cutthroat competition and can make money solely through subscriptions because the market still had substantial growth potential at the time. Once that growth subsides, intensifying competition becomes inevitable—much like the current situation with China's long‑form video platforms."

"The subscription model isn't inherently bad; it's just that the market space is limited. Not everyone minds ads, and not everyone can afford to subscribe," says Hong Jiajun, whose perspective is far more expansive.During economic downturns, even overseas users with strong payment habits are beginning to exhibit price sensitivity.

Subscription revenue determines ARPU, and multiplying the subscriber base by ARPU yields Netflix's most fundamental business model. Before it introduced advertising, Wall Street naturally viewed subscriber count as Netflix's most critical operational metric—yet for the long‑form video business, that approach is profoundly unforgiving.

"The long‑video industry has one major characteristic: no one can rest on their laurels."Zhang Jiaxin said, "As long as you want users to stay on your platform and boost customer acquisition and retention, you need to continuously attract and stimulate public attention."

This is an endless war that demands continuous investment; there's no such thing as mass‑production. The economies of scale characteristic of the internet economy simply don't translate to the streaming‑media space.

As the industry's "lighthouse" has stumbled, more voices are calling for a reevaluation of the very nature of the long‑form video business.

Some investors stated that,"I'm not optimistic about using content‑driven streaming platforms as a monetization channel; such businesses can only serve as traffic‑acquisition tools. Over the long term, their valuations will likely converge with those of traditional television networks."

Meanwhile, multiple analysts interviewed by 36Kr all believe that,Today's challenges facing Netflix are ones that Disney+ and others will eventually face as well. "It all comes down to who can grit it out—only the odds differ. In terms of financial strength, Netflix has a slightly lower chance of holding on than Disney+."

On May 16, 25 days after a sharp plunge, Netflix updated its corporate culture handbook for the first time in five years. In the "Artistic Expression" section, the company warned employees that they "may be called upon to work on content that conflicts with their values," adding, "If you can't stomach the kind of content you're asked to create, then it's time to leave."

Amid market panic, Netflix itself has begun to waver. Having lost its guiding principles, will Netflix continue to lose its soul?

(At the interviewee's request, Zhang Jiaxin is a pseudonym.)

Author |Song Wanxin

Editor |Pan Xinyi

$Netflix (NFLX.US)$

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