A group of Netflix shareholders filed on Tuesday a securities class action lawsuit against the company, seeking to recover their investment losses stemming from Netflix’s recent earnings reports. Netflix CEO Reed Hastings as well as executives Ted Sarandos and Spencer Neumann are listed as the lawsuit's defendants.
The lawsuit, led by a trustee of Imperium Irrevocable Trust and filed in a U.S. court in California, represents those who purchased Netflix stock between October 19, 2021, and April 19, 2022. It alleges Netflix misled shareholders about the scope of the streaming service’s subscriber losses.
Shareholders claimed Netflix made “materially false” and/or misleading statements about the company’s business and prospects.
“As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages,” the complaint read.
The complaint went on to say on January 20, 2022, when Netflix reported its Q4 2021 earnings, the company wrote in a letter to shareholders it “slightly over-forecasted paid net adds in Q4.” Yet Netflix noted it finished the quarter with 222 million paid subscribers and was “optimistic about [its] long-term growth prospects.”
Netflix went on in that letter to project a 2.5 million subscriber gain for the following quarter, stating “our guidance reflects a more back-end weighted content slate in Q1 2022.” In this case, Netflix was referring to two of its anticipated releases, the second season of “Bridgerton” and its new original film “The Adam Project" – both of which released in March.
Despite these predictions, Netflix reported dismal Q1 2022 earnings report on April 19 – when the company recorded a loss of 200,000 net subscribers. Netflix wrote to shareholders that retention was “slightly lower” relative to its guidance forecast but remains at a “very healthy level.” Following the report, Netflix stock plummeted 35%.
The lawsuit is seeking damages for declines in Netflix's stock price (which also dropped 20% in January after Q4 earnings) stemming from subscriber losses and slowed growth, and requested a jury trial.
Netflix also attributed password sharing as a factor in its underwhelming financial performance, citing over 100 million additional households are accessing Netflix without paying for an account. In an attempt to mitigate password sharing, Netflix in March began testing an additional fee in a few Latin American markets for subscribers who shared accounts outside their household.
“Account sharing as a percentage of our paying membership hasn’t changed much over the years, but, coupled with the first factor, means it’s harder to grow membership in many markets - an issue that was obscured by our Covid growth,” Netflix wrote in its April 19 letter to shareholders.
The pending lawsuit, coupled with a shrunken subscriber base, signal rocky prospects for Netflix. Recent research from Aluma Insights found that 13% of adult Netflix users would likely cancel the service if they had to pay an additional $3 per month for out-of-home users. Netflix is also considering implementing an ad-supported tier – a big shift from its long-established ad-free SVOD model.