Netflix ( NFLX ) reports Q2 earnings after the bell on Tuesday — and investors are bracing for an impact.
The streaming giant said it expected to report a loss of 2 million subscribers for the second quarter after announcing an unexpected first quarter subscriber loss of 200,000 users in April.
Netflix stock, currently trading at around $180 a share, has plunged 70% year to date amid a broader market selloff that has slammed growth stocks and prompted talk of a possible recession.
Here’s the good, the bad, and the downright ugly about Netflix ahead of next week’s earnings.
The good
Netflix’s upcoming ad-supported tier, along with a crackdown on password sharing, should help boost revenue as the platform grapples with a post-COVID subscriber slump. Read also : The Philadelphia couple marries their real estate agent.
The streaming giant will partner with Microsoft (MSFT) to help deliver the new offering, which is expected to hit the market later this year (although some analysts think otherwise given Microsoft’s lack of experience in the third-party ad-tech business party.)
Still, Wall Street is generally bullish on ads.
“Taking advantage of the $160bn global video ad spending opportunity in the long term should allow Netflix to drive average revenue per unit (ARPU) growth with less reliance on consumer price increases,” Morgan Stanley analyst Benjamin Swinburne emphasized in a new note.
He added, “In markets with high ad ARPUs, such as the US, Netflix can offer a significantly lower price proposition and unlock additional net additions without sacrificing unit economics. Advertising can also be a user-friendly way to take advantage of password sharing.”
Swinburne, who lowered his price target on the stock from $300 to $220 a share, revealed that the bank will need to see a re-acceleration in net additions, as well as signs of traction from advertising and cryptocurrency sharing over the next 12 months in order to return back to bull case $300.
Overall, the analyst said ARPU growth is more important than net adds, suggesting that Netflix will continue to raise prices down the line, as well as press on ad-generated revenue.
Netflix’s strong slate of original content — from “Stranger Things” to “Squid Game” — should help the platform attract new users and maintain existing ones.
“Stranger Things” season 4, in addition to breaking Netflix’s record for the biggest premiere weekend ever, earned the highest number of viewers among all Netflix English seasons, with 930.3 million hours watched in its first 28 days.
Netflix’s smash hit “Stranger Things” (Courtesy: Netflix)
Still, the Duffer Brothers production was unable to eclipse the South Korean hit “Squid Game,” which nabbed 1.6 billion hours over the same time period.
Both titles received several Emmy nominations this year, including a best drama nod for “Squid Game,” which will battle awards show darling “Succession” for the top prize.
Other originals such as “Bridgerton,” “The Witcher,” “The Umbrella Academy,” and “You” also contributed to significant spikes in global viewing following their premieres – another sign that content is still king on the streamers.
Amid shrinking subscriber growth, Netflix has begun cutting costs and focusing on cost control — a positive for free cash flow, which investors have often criticized.
Job postings for the company are at an all-time low – down 55% year-on-year, according to Thinknum data, cited by Bank of America.
In June, the company laid off about 300 workers to combat “slower revenue growth.” The job cuts followed Netflix’s last round of layoffs in May when the streamer laid off 150 members of its workforce.
Bank of America said Netflix’s latest layoff announcement suggests “the company may be beginning to adjust its focus on content costs as a means of right-sizing expenses (e.g. cutting staff from specialty programming / content auditing).”
The Bad
Bank of America expects subscribers to peak in the US and Canada in three years with 80 million users, while international subscribers are estimated to reach 220 million in 18 years. To see also : The Favorite-Favorite Spider-Man Animated Series has been circulating on Netflix.
Potential peak subscriber penetration has contributed to lower price targets and bearish sentiments from analysts regarding subscriber growth.
Many have warned that if the US saturation point approaches faster than expected, it could lead to major downside risk, especially amid increased competition.
FX pressure continues to cause problems for Netflix.
Bank of America said it expects “Foreign Exchange (FX) to creep further into the discussion as the dollar shows no near-term signs of weakening against the overall basket of currencies.”
The bank estimates that Netflix could see around $267 million of FX headwinds to revenue in the second quarter, noting that ARPUs in developed markets fell -4.4% to $13.16 while emerging markets slipped -4.0% to $9.47 compared to the bank’s last check on April 15.
The Ugly
“Streaming video revenue could be more vulnerable than expected to a global recession and lower consumer spending levels,” Morgan Stanley’s Swinburne said in its note, citing the streamer’s pricing premium as a net negative for customers looking to trim their streaming bill. See the article : Will the campaign be about abortion against inflation? – “Sunday Political Brunch” – July 10, 2022.
Bank of America added that a recession scenario could lead to higher subscriber churn and/or limit pricing power – both major risks to the downside.
Competition, which has intensified over the past few years, continues to put increasing pressure on churn – and could even kill Netflix’s promising ad-supported plan with Disney + (DIS) also set to introduce its own supported tier by advertisements by the end of this. year.
According to recent data, cited in a Bank of America note, customers across all income levels would switch to a discounted ad-based alternative – however, “ad layering could be a way for consumers across all income brackets extend their streaming. budget by trading up to subscribe to an additional service, benefiting Netflix’s competitors far more than Netflix itself.”
In addition, competition could potentially limit growth in new markets, which Netflix will need to rely on once peak penetration reaches the US.
Alexandra is a Senior Entertainment and Food Correspondent at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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