Netflix’s collapse is a warning sign for stocks

What’s happening: Netflix’s stock dropped 30% when the market opened on Wednesday, instantly wiping more than $45 billion off the value of the company.

Netflix said it shed 200,000 subscribers in the first three months of the year, when it had been expecting to add 2.5 million.

The streaming giant, whose stock had already dropped more than 40% year-to-date, blamed the attrition on increased competition for viewers and Russia’s invasion of Ukraine.

Netflix said its decision to pull out of Russia cost the company 700,000 subscribers. But the economy isn’t helping, either.

Inflation is forcing households to reevaluate their budgets. People in Great Britain canceled about 1.5 million streaming subscriptions in the first three months of 2022. More than a third did so to save money, according to a new report by media consultancy Kantar.

“Food and energy are people’s priorities right now, not watching ‘Stranger Things,'” CMC Markets chief market analyst Michael Hewson told me.

Netflix signaled it could make big changes to its business as it tries to stem the bleeding. It’s taking another look at how to address password sharing. CEO Reed Hastings also told analysts that the company will consider a lower-price subscription option with advertising.

“I’ve been against the complexity of advertising and a big fan of the simplicity of subscription,” Hastings said Tuesday. “But as much as I’m a fan of that, I’m a bigger fan of consumer choice.”

Big picture: Hewson said the stock plunge shows that Netflix was extremely overvalued, as investors — flush with cash during the pandemic recovery — fed a huge rally. Shares of Netflix rose 86% from the end of 2019 through 2021, while the S&P 500 climbed 48%.

“They were assuming people were going to be locked down forever,” Hewson said, adding that unlike Apple and Amazon, Netflix doesn’t have many alternative sources of revenue.

Clearly, the market mood has changed. The strong reaction could set the stage for another turbulent earnings season, with investors already on…

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