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Netflix reports its second-quarter earnings on Tuesday, and the preparations feel like preparing for a hurricane. A storm is coming. It must be going badly. Shareholders pray that the foundation is strong enough to withstand the losses.
Netflix remains the world’s largest streaming service, but the company earlier this year reported its first quarterly subscriber decline in more than a decade and warned it expected to lose 2 million global subscribers in the second quarter. That would be the biggest quarterly loss in the company’s history.
It is possible that the losses will be even greater than predicted. Macroeconomic trends are worrying. Concerns about a potential recession and rampant inflation may already be slowing spending, with US Netflix’s standard US plan at $15.49 a month, making it more expensive than all other major streaming services. This may be the first option people give up to save money.
The competition also continues to grow. By the end of the year, HBO Max will likely add all content to its Discovery+ service, which costs $14.99 a month or $9.99 with ads. Disney last week raised the price of ESPN+ by $3 to $9.99 a month, but kept its Disney+, Hulu and ESPN+ offerings at $13.99 a month. This could bring more customers to the Disney package, another potential alternative to Netflix.
“I don’t know if [this quarter] is bad, but it’s not a good story,” said Andrew Rosen, former head of digital media at Viacom and founder of streaming newsletter PARQOR.
In early 2022, many analysts predicted that Netflix would add more than 20 million new subscribers that year. Back in April, JP Morgan analyst Doug Anmuth estimated the company would add 17.95 million in 2022. After last quarter’s bombshell news, he lowered his full-year forecast to about 4 million.
The big question about how Netflix stock will perform after the results is released is how much bad news has already been baked into the stock price. Already, Netflix’s market value has gone from $300 billion to less than $90 billion in less than a year.
“Right now, I think the markets are focusing on subscribers,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, told CNBC on Monday. “I think there’s a lot of potential outcomes in terms of how much deterioration they actually see and how far into the future it goes.”
Weathering the storm
As last quarter’s earnings conference call was coming to a close, Netflix CFO Spencer Neumann stepped in to reassure investors that both the third and fourth quarters would see positive growth. This may interest you : How will we know if the United States is in recession?.
Neumann said the projected loss of 2 million subscribers in the second quarter doesn’t mean the losses will continue: “We’re growing revenue. And there will be additional paid growth,” he said.
A scene from the third season of “Stranger Things” where the Hawkins team is in adulthood and faces enemies old and new.
Netflix is hoping to boost growth with a stronger content offering, including a new season of “The Crown” and the nearly $200 million budget actioner “The Gray Man,” starring Ryan Gosling and Chris Evans. Rosen said it needs to “over-deliver” in international regions – Latin America, Asia-Pacific and its EMEA unit – to account for growing headwinds in the US and Canada.
Netflix also has a lot that other streamers don’t. It’s primarily about making money, and all signs point to that not changing anytime soon. Most analysts predict this year’s net income to be close to $5 billion. By contrast, NBCUniversal’s Peacock will lose $2.5 billion this year. Even Disney, which has already added nearly 140 million Disney+ subscribers worldwide since launching in late 2019, lost $887 million on its streaming products last quarter.
And with 222 million subscribers worldwide — at least before the official losses announced Tuesday — Netflix is still the biggest streaming service on the planet. This is a big draw for any creator looking to create content for the largest possible audience. It’s also a significant carrot for advertisers, who will finally get exposure to Netflix’s audience later this year when the company launches an ad-supported subscription option for the first time.
Netflix also plans to crack down on password sharing worldwide, a process that could add tens of millions of new subscribers over time. Netflix estimates that over 100 million households around the world do not pay for Netflix, over 30 million of which are in the US and Canada.
But longer-term efforts are yet to manifest, and the main theme of Tuesday’s results may simply be damage control.
Netflix shares rose 1% to $190.92 on Monday and are down more than 68% year to date.
WATCH: Netflix investors still focused on subscribers in the near term, says BMO’s Yung-Yu Ma
