Key lessons from the Netflix share price crash
Higher the climb, the faster the fall
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The share price of Netflix crashed 35 per cent on Wednesday and 4 per cent more on Thursday after the over-the-top (OTT) platform provider revealed that it had lost two lack subscribers in the first quarter of the calendar year 2022, well short of its modest predictions of adding 2.5 million subscribers.
The markets' sharp reaction to this news is a sign of how quickly disappointment can set in on highly-valued stocks and the potential damage if their performance stumbles.
When COVID hit the world, its stock zoomed to a high of $700.99 by November 2021, up from $325 at the start of 2020, as work-from-home gained acceptance, folks were locked into their homes, and more and more people subscribed to the OTT platform. It was part of the sought-after FAANG stocks, with Indian AMCS even launching funds dedicated to the theme.
Some analysts then cautioned that the stock price rise was not matching the fundamentals of Netflix. According to them, the rally was prompted by a group of smart retail traders and investors who pushed the share price sky-high to squeeze short-sellers.
Veteran investor Bill Ackman has liquidated his $1.1-billion bet on Netflix with a loss of more than $400 million, as the share price fell sharply on Wednesday. Ackman's actions show that stock price falls may not always offer buying opportunities. Sometimes, you may have overestimated a stock's potential in market euphoria.
Betting on the theme?
Investors should also be aware of the risks involved in the thematic stock. Most of these stocks attract investors betting on some 'wild' assumption. For instance, there was a perception that the prospects of DTH, OTT and digital media companies would explode as the whole world is shifting to digital media in a big way. However, acute competition and regulatory issues can affect performance.
If a company's stock is not performing as expected, it is prudent to exit the stock and deploy the funds elsewhere.
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