Passive funds unable to avoid US television streaming giant Netflix have taken the biggest hit from the firm’s share price fall today, while others such as those run by Baillie Gifford have also been affected.
First-quarter results showed that revenue growth slowed, up just 9.8% versus 24.2% the previous year, but the key metric the market focused on was new subscriptions, which the firm estimates will drop by 2 million over the course of the year.
There has been concern for the stock as the introduction of Disney+, Amazon Prime and other streaming services made it difficult to keep increasing subscription numbers in perpetuity, while a price rise last year now appears ill-timed.
Overall, new subscribers fell by 200,000 in the first quarter, although the suspension of services in Russia was responsible for a 700,000 decline.
The news was not well received by the market, with shares down 37% on the day and 63.2% overall in 2022.
Share price of Netflix year-to-date
Source: Google Finance
Investment trust Manchester & London has the highest exposure to the stock among any fund or trust in the Investment Association or Association of Investment Companies universes, at 5.7%, while the First Trust Dow Jones Internet UCITS ETF is second with a 3.9% position.
Among active funds, Baillie Gifford American took the biggest hit. The company had a 3.5% weighting in the fund according to its latest factsheet, while Baillie Gifford Global Stewardship held a 2.2% position.
Source: FE Analytics. Data accurate based on the funds’ most recent factsheets.
Laura Hoy, equity analyst at Hargreaves Lansdown, said Netflix’s price increases have helped offset pain from a decline in new subscriber numbers – but the group is looking for a permanent way to cope with rising demand for the public’s attention.
An estimated 100 million households are currently using the service without paying subscription fees through shared memberships, the report found, something that the firm may look to resolve.
Another difficulty is competition. “Streaming services are a dime a dozen these days and standing out is an expensive undertaking. Unlike rivals Disney and now Amazon, which owns a trove of content through its MGM acquisition, Netflix doesn’t have much of a back catalogue of content, comparatively speaking,” Hoy added.
Neil Campling, head of TMT research at Mirabaud Equity Research, said that the firm may also look to subsidise the streaming service with adverts, a move it has previously been reluctant to contemplate.
“Netflix is now the priciest streaming service, and competition is biting. Netflix has to consider a cheaper tier, supported by advertising, as it has exhausted the core cohort it has served to date,” he said.
“It is also, effectively, an admission that its last price increase was a mistake. Not least because the timing couldn’t have been worse – consumers are feeling the pinch from inflation everywhere, and so even the ‘throwaway’ $15/month is no longer a throwaway as every dollar/pound/euro counts in household budgets.”
He suggested the firm should look to make an acquisition, with “the most obvious target” being a rival TV company such as Paramount+.
“That would give Netflix an additional brand that offers lower-priced tiers of service, one of which carries ads, thereby diversifying its revenue,” he said.
Hoy added that another avenue for the firm could be gaming, with two acquisitions bolstering the group’s ability to serve an entirely new market