The stock market fell on Friday as the sell-off in tech stocks intensified after Netflix posted lackluster earnings—with the Nasdaq Composite falling deeper into correction territory and posting its worst week since 2020.
The Dow Jones Industrial Average fell 1.3%, around 450 points, while the S&P 500 lost 1.9% and the tech-heavy Nasdaq Composite 2.7%.
The Nasdaq fell further into correction territory—over 10% from its record highs last November—and has plunged over 7% this week alone, its worst since October 2020.
Shares of streaming giant Netflix dragged down the index, plunging 22% on Friday after the company’s fourth-quarter earnings report showed a slowdown in subscriber growth.
Streaming rival Disney fell nearly 7%, while other big tech names like Tesla and Amazon lost over 5% and 6%, respectively.
Tech stocks have been getting hammered recently, largely thanks to a continuing surge in government bond yields this week, with the U.S. 10-year Treasury hitting a high of 1.9% on Wednesday.
Investors have remained laser focused on the Federal Reserve and how it will deal with surging inflation, with the central bank tightening its monetary policy and preparing to raise interest rates as soon as March.
Shares of Peloton rebounded 10% on Friday, a day after the stock plunged 24% on reports that the company would temporarily halt production of its at-home fitness products amid waning demand—but CEO John Foley later said the reports are false.
“Wall Street has gone from debating how aggressive one should rotate out of tech into cyclicals, to sell it all,” says Edward Moya, senior market analyst for Oanda. “U.S. stocks have been on a rollercoaster ride after abysmal results from Netflix.” With inflationary pressures “not going away anytime soon,” the Fed could potentially become “overly aggressive in tightening monetary policy,” he warns.
Stocks are off to a dismal start to 2022 so far. The Dow is down over 6% in January, the S&P 500 has dropped over 8% and the tech-heavy Nasdaq more than 12%. Markets have struggled to gain footing amid rising investor concerns around high inflation and tighter monetary policy from the Federal Reserve.
“Absent some kind of systemic shock, as long as earnings stay solid and interest rates remain in the range we have seen in the five years before the pandemic, stock prices are likely to have a solid foundation over time,” says Brad McMillan, chief investment officer for Commonwealth Financial Network. “That solid foundation also suggests that when those worries subside, valuations and stock prices can bounce back reasonably quickly, as we saw in 2020, 2018, and indeed after the financial crisis itself.”
Next week’s tech earnings, with companies like Apple, Microsoft and Tesla all reporting results.
I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaire and their
Despite clear signs that growth was slowing, Netflix executives spent most of last year arguing that the deceleration in subscriber growth was temporary. Management finally acknowledged the obvious in conjunction with the company’s Q4 earnings release.
Netflix reported 8.3 million paid net subscriber additions for the fourth quarter — slightly below its Q4 2020 performance and its forecast — and it expects to add just 2.5 million subscribers in the first quarter (down from 4 million a year ago). CFO Spence Neumann said that subscriber retention has been healthy but the pace of new member acquisitions hasn’t recovered to pre-pandemic levels.
Netflix stock plummets
Investors punished Netflix stock viciously for the subscriber miss. Barely more than two months ago, the shares hit an all-time high of $700.99. The stock had already retreated to just above $500 before Netflix’s earnings report, largely because of a broader sell-off in high-flying tech stocks. Netflix stock dropped another 22% after the earnings report, pushing the shares below $400 for the first time in almost two years.
The abrupt pullback is hardly surprising in light of Netflix’s recent results and forecast. For many years, Netflix has been valued as a growth stock. Now, investors have to reckon with the fact that Netflix may be close to saturating many of its markets. If the company’s Q1 guidance is any indication, subscriber growth could moderate again to roughly 6%-8% this year.
To be fair, price increases should keep Netflix’s revenue growing at a double-digit rate in 2022. (Netflix is raising the prices of most plans by 10% to 11% in the U.S. and Canada this quarter.) But that was a small consolation to investors, as Netflix risks further handicapping its subscriber growth if it raises prices too much.
Could Netflix be a good value stock?
While Netflix is falling out of favor with growth-focused investors, it is starting to gain merit as a value stock. Despite its somewhat disappointing subscriber gain, Netflix posted earnings per share (EPS) of $1.33 last quarter, easily beating its guidance and the analyst consensus of $0.82. This brought its full-year EPS to $11.24.
Netflix expects its operating margin to retreat somewhat in 2022 — largely due to exchange rate pressures — following several years of extremely strong margin expansion. Still, margin expansion will likely resume in 2023. Even with slower subscriber growth, the operating leverage inherent in Netflix’s business model should enable the company to grow revenue faster than expenses for the foreseeable future.
Netflix stock’s recent plunge has left it trading for just 35 times the company’s 2021 earnings. While that still represents a premium to the market, it’s a far cry from a year ago, when the stock traded for over 80 times earnings.