Netflix Plunge Deepens Nasdaq’s Correction

Netflix shares were the latest drag on the Nasdaq, falling 22% after the company reported slowing subscriber growth late Thursday, on pace for its biggest drop since 2012. Other major tech stocks, including Facebook parent Meta Platforms Inc. , Amazon.com Inc. , and Tesla Inc. , followed the streaming giant lower.

Tech stocks were under pressure even before Netflix reported results. The benchmark had already entered into a correction—defined as a drop of 10% or more from a closing high—on Wednesday. About 71% of the stocks that trade in the Nasdaq are down at least 20% from their recent highs, a level that’s considered bear territory. More than half are down 40% or more.

Thursday’s trading looked like it might deliver a reprieve for the group after the Nasdaq rose more than 1% in morning trading, only to make a hard pivot lower later in the day. The index ended up falling 1.3%.

“Dip buyers still came in, but they didn’t stay long enough to keep it lifted,” said Liz Young, head of investment strategy at SoFi.

That was the first time the Nasdaq erased an intraday gain of more than 1% and closed lower by more than 1% on back-to-back days in more than 20 years, according to research firm Bespoke Investment Group.

Things got worse after Thursday’s closing bell. Netflix missed analysts’ subscriber growth forecasts and said it expects to add a much smaller number of subscribers in the current quarter than it did a year ago. Shares fell more than 20% in after-hours trading.

The Nasdaq had been teetering on the verge of a correction over the last two weeks, as the rapid run up in bond yields and concerns around how quickly the Federal Reserve will tighten monetary policy to combat inflation, eroded investors’ longstanding devotion to the tech trade.

It has been 63 full trading days since the Nasdaq’s Nov. 19 record, making this correction for the benchmark—its 14th since the 2008 financial crisis—longer than most others over the last two decades, Bespoke said.

Much of the selling has centered around unprofitable tech and other growth stocks, many of which saw big gains during the first year of the Covid-19 pandemic, pushing valuations into frothy territory. As the market confronts the prospect of a series of rate increases by the Fed, along with the fast rise in bond yields, the valuation pictures for those stocks have inevitably come down as analysts and investors factor in the prospect of lower cash flows.

Companies like Peloton Interactive Inc. , Roku Inc. and DocuSign Inc. are all down more than 20% this month alone—and at least 60% over the last six months. That has led to massive losses for tech-focused investors such as Cathie Wood and her ARK Innovation ETF, which is down 23% so far in January and trading at levels last seen in July 2020. The ETF fell another 1.9% on Friday.

“The big story so far in 2022 has been the rapid move higher in interest rates, which is prompting investors to reassess valuations for some of the most expensive segments of the market,” said David Lefkowitz, head of equities Americas at UBS Financial Services, in a Friday note to clients.

Write to Michael Wursthorn at [email protected]