Netflix and Shopify are struggling and the way ahead is anything but clear

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Netflix Inc. NFLX-Q, the U.S. movie-streaming pioneer, and Shopify Inc. SHOP-T, the Canadian e-commerce giant, might not appear to have a lot in common. But they are now locked in a similar battle: trying to convince investors that they can still expand at a brisk pace.

If this week is any indication, the two companies are in for a tough slog – and investors will have lots to consider as they weigh falling share prices against an operating environment that no longer looks as enticing as it did during the depths of the pandemic.

Netflix lost 200,000 subscribers in the first quarter of 2022, dashing expectations for 2.5 million new subscribers. That sort of reversal hasn’t been seen over the past decade and it marks a dramatic shift from intoxicating growth during the recent lockdowns.

In 2020, when movie theatres closed their doors, the company added 37 million paid memberships. The gains brought the total global subscriber base to 200 million, even as streaming competitors flocked to the streaming space.

Last year, as Squid Game grabbed viewers’ attention, the impressive pace of growth continued: The total number of paid memberships rose to 222 million, including 8.3 million net new subscriptions in the fourth quarter – driving Netflix’s share price to a record high of just over US$700 in mid-November.

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And now? Netflix’s share price has plummeted 70 per cent over the past five months, including a 35 per cent free fall on Wednesday. The stock is now trading at its lowest level since December, 2017, or more than two years before the pandemic began.

Shopify has suffered a similar rise and fall.

The share price of the Ottawa-based company, which provides software for small and mid-sized businesses to sell their products or services online, rocketed during lockdowns when consumers were largely limited to making online purchases.

In 2021, online sales coursing through Shopify’s platform – or gross merchandise volume – increased by 47 per cent from 2020, to US$175-billion.

As investors bet that the pandemic spurred a permanent shift toward online shopping, Shopify blossomed into Canada’s most valuable company. From early 2020 to late 2021, market capitalization, or the value of the company’s outstanding shares, increased by about $90-billion.

Over the past five months, though, these gains have disappeared. Shopify’s share price has fallen 73 per cent from its record intraday high of $2,223 – also in mid-November – amid compelling evidence that consumers still like stores.

According to the U.S. Census Bureau, online sales fell to 12.9 per cent of total U.S. retail spending in the fourth quarter of 2021, down from a high of 15.7 per cent in mid-2020. Investors will get a look at the first-quarter figure for online sales when it is released on May 19.

Todd Coupland, an analyst at CIBC World Markets, said in a report this week that web traffic to Shopify e-commerce sites declined 6 per cent in the first quarter and 9 per cent so far in April.

To be fair, Shopify and Netflix are suffering from more than concerns about growth. Rising interest rates amid surging inflation have weighed on the valuations of many technology companies, pushing down the Nasdaq Composite Index since mid-November.

The big question now is whether the two struggling stocks can make a comeback.

Some valuation ratios suggest that the stocks are certainly cheaper today. Netflix shares traded at 9.6 times sales in 2021, according to Morningstar; the ratio is now just 3.3. Shopify’s price-to-sales ratio has fallen from 41.4 in 2021 to 13.3.

Yet despite lower valuations, neither stock looks like a bargain on this measure, which adds to the dangers of buying into a severe sell-off – or holding on – amid uncertainty over growth.

Bill Ackman, the Pershing Square hedge fund manager, dumped his Netflix shares at an estimated loss of US$400-million this week.

There is a bullish case here, though: While both companies are suffering lockdown hangovers, they are leaders in areas that are enjoying enormous popularity.

Shopify is building an e-commerce ecosystem, including payments and warehousing, and it is expanding through acquisitions. Netflix is exploring an advertising-supported version of its streaming service and – note to my mother – may be able to extract more revenue from existing customers by cracking down on password sharing.

Is that enough to entice investors back to either stock?

Analysts at Credit Suisse argued this week that Netflix remains the clear leader in movie streaming and operates in a massive global market with untapped customers. But, the analysts added, “defining a ‘safe’ entry valuation is challenging until estimates have clearly bottomed.”

Both Netflix and Shopify have suffered similar declines from their November peaks. They may remain joined at the hip for some time.

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