Netflix Faces Class Action On Allegations It Withheld Crucial Information

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Netflix, Inc. (NFLXlast month reported disappointing results for its first quarter and the stock has shed over 40% since. Disgruntled investors now think the streaming giant may have misled investors in 2021 regarding its fundamental performance and have taken to legal recourse.

What Happened

Netflix issued false and/or misleading statements regarding its business and failed to disclose material adverse facts about its business operations and prospects, shareholders alleged in a lawsuit filed with the U.S. District Court of the Northern District of California earlier this week.

The lawsuit was brought about by Fiyyaz Pirani, trustee of Imperium Irrevocable Trust. Netflix and the company's co-CEOs Reed Hastings and Ted Sarandos as well as Chief Financial Officer Spencer Neumann were named as defendants.

The plaintiff alleged that Netflix misled investors by forecasting an 8.5-million jump in subscribers on its quarterly earnings call in mid-October. On the next earnings call held on Jan. 20, 2022, the company came back and said it slightly over-forecasted paid net adds for the fourth quarter. The numbers were around 8.3 million, the company said.

Netflix issued a muted net paid adds forecast of 2.5 million for the first quarter but reported a loss of 200,000 subscribers for the quarter.

The lawsuit alleged that the company did not disclose that it is seeing slower acquisition growth due to account sharing and competition and was facing difficulties in retaining customers.

The company was losing subscribers on a net basis and its financial results were adversely affected, it added.

"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 plaintiff alleged in the filing.

As a relief, the plaintiff has sought compensatory damages in his favor and all other Class members, and reimbursement of legal costs and other expenses.

Following the disappointing first-quarter results, Netflix announced several initiatives to mitigate the subscriber-loss woes. These measures included a crackdown on password sharing and the introduction of an ad-supported option.

Analysts are of the view these fixes may not lead to a near-term improvement. KeyBanc Capital Markets analyst Justin Patterson said even with these fixes, net add growth could take at least 18 to 24 months.

Netflix shares closed Wednesday's session 2.07% higher at $204.01, according to Benzinga Pro data.

© 2022 Benzinga does not provide investment advice. All rights reserved.

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