Because of concerns about the recession, a slowdown in advertising, and post-pandemic audience trends, the biggest US media companies have collectively lost nearly $400 billion in market value this year. This created a "perfect storm" for Netflix and its competitors.
Big US media stocks have lost an average of 35% since the beginning of the year, compared to a 13% decline in the S&P 500 index, totaling market capitalization losses of $380 billion.
The stock prices of the biggest media companies, including Disney, Netflix, Comcast, Spotify, Roku, Fox, Paramount, Warner Bros. Discovery, The New York Times, and News Corp., have, on average, dropped by half from their all-time highs reached during the coronavirus pandemic, according to a Financial Times analysis. This is true even after some recent improvement.
Analysts and executives assigned a variety of causes for the deflating of the Netflix-fueled media stock bubble.
People in the US and other countries are spending more time outside and less time inside in front of screens as they recover from the pandemic. In the same period, Netflix disclosed that its ten-year growth had stopped, alarming investors about the state of the sector as a whole.
As central banks raise interest rates to rein in soaring inflation and Americans deal with tighter household budgets, these issues have coincided with broader fears of a US recession.
As seen in the second-quarter results of Snap, Meta, and Google, advertising, typically the first line item of spending that companies cut in a downturn, is already slowing down.
"How much is the pandemic screwing up the trajectory? How much is the economy? How much is people wanting be outside more? There’s so many factors right now. I would almost call it the perfect storm to blow up the streaming story," said Rich Greenfield, an analyst at LightShed.
The businesses that depend most heavily on streaming and advertising have been hardest hit.
Shares of Roku have fallen 65% this year and 83% from their all-time high in July 2021. Roku made its name selling streaming devices but now makes more money from advertising on its channels.
Roku CEO Anthony Wood recently informed investors that "we are seeing advertisers worried about a possible recession and so we’re seeing them reduce their spend."
"[Roku's] recent run of results, like many others over the past few years, were propped up by the massive acceleration in streaming video that has now faded as the world has opened up," said Michael Nathanson of the media consultancy MoffettNathanson.
After an unprecedented online advertising bubble caused by a pandemic, Nathanson continued, "We are living through the first digital advertising recession."
After Roku, Netflix had the worst performance. Its stock price has dropped 67 percent from its November highs and 62% over the past year. Another streaming pioneer, Spotify, which primarily relies on subscription revenue, has seen a 49% decline this year.
After ten years of explosive customer growth, Netflix has lost subscribers for the past two quarters, which has caused a fundamental review of the sector it helped create.
Prior to this, investors had high hopes for Netflix's expansion, which helped it rank among the top-performing stocks of the decade alongside Facebook, Amazon, and Google. In order to reward Netflix's rapid growth at the expense of profit, they treated it like a tech stock.
With their own streaming services, other media companies, like Disney, have imitated the Netflix business model. They were rewarded for doing so with a price to earnings multiple resembling that of tech companies and Netflix. The biggest US media companies traded at a multiple of 49 times trailing earnings on average at the end of the previous year. That number has now decreased to 19 times.
The best-performing media companies are those that continue to focus primarily on television and film. Retransmission fees, which cable companies pay broadcasters to carry their content, are more stable than advertising because contracts are frequently long-term commitments.
Fox, which derives the majority of its revenue from retransmission fees for its news and sports cable channels, has decreased only 9% this year and 24% from its all-time high last year.
Disney, which generates billions of dollars annually from its theme parks, blockbuster movie tickets, and streaming, has seen a 30% decline this year. The company traded at a multiple of more than 100 times its earnings the previous year. The current valuation is 45 times earnings.
"There’s been a pretty massive shift from believing in the streaming future, to recognition that . . . the streaming future is not nearly as profitable or as valuable as people had thought," according to Greenfield at LightShed.
By fLEXI tEAM