Netflix’s Hit Addiction Makes Stock Pricey

Subscription software stocks like Zoom Video and Atlassian have been one of the hottest tech sectors on Wall Street in the past couple of years, thanks in part to their reliably recurring revenue. Investors love the predictability of subscription businesses.

But that predictability disappears when subscriber growth is driven by hit products as ephemeral as a popular TV show. That’s an issue for Netflix right now, which last quarter reported its first drop in U.S. streaming subscribers since 2011. Netflix stock has since fallen 15%. Netflix’s explanation—that the quarter’s “content slate drove less growth” than expected—suggests its business has become more hit driven. Given the ease with which subscribers can cancel, that implies Netflix’s business going forward will be more volatile than investors may realize.