Netflix will reveal its financial results from the second quarter on Tuesday afternoon, and the outcome is expected to set the tone for one of the most anxious and uncertain earnings seasons in years.
The report will have “wide-ranging implications for the stock and the media ecosystem,” in the view of Guggenheim analyst Michael Morris.
Last quarter, Netflix issued a warning about its second-quarter performance, saying it could shed as many as 2 million subscribers, though it continues to pace the streaming business with about 222 million worldwide. Investors last April reacted harshly to the company’s first subscriber losses in more than a decade, punishing the company’s shares, which had already fallen from their 2021 all-time high. Over the past six months, about two-thirds of the company’s market value has been destroyed. Wall Street has not only been scrutinizing the sudden subscriber plateau but also the traction of streaming rivals, not only former programming suppliers like Disney, Warner and NBCUniversal but from deep-pocketed tech foes like Apple and Amazon.
A few items in particular will be center stage when Netflix steps into the spotlight: the subscriber narrative as well as updates on the rollout of a cheaper, ad-supported tier and efforts to curb free password sharing. The latter two initiatives were trumpeted by the company last quarter, though the about-face on advertising after years of insisting it would never take ads left a lot of observers flummoxed, especially given the hasty and scattered way it was communicated. (Co-founder and Co-CEO Reed Hastings dropped the bombshell during the company’s video earnings interview but nothing in writing was contained in Netflix’s quarterly letter to shareholders. Co-CEO Ted Sarandos offered a more smoothly messaged presentation at Cannes Lions last month, and the company also locked in a partnership with Microsoft, which acquired ad-tech operation Xandr from AT&T in 2021.
Another strategic focal point is programming spending. Netflix has been creeping toward the $20 billion annual mark, but its executives have recently signaled some movement toward moderation. Scott Stuber, who heads the company’s film division, told The New York Times in a story published today that the company is going to continue taking big-budget swings like The Gray Man, the Russo Bros. spy thriller now in theaters and coming to streaming on Friday. “We’re not crazily reducing our spend, but we’re reducing volume,” Stuber explained. “We’re trying to be more thoughtful.”
Despite such overtures aimed at assuaging Wall Street worries, analysts are increasingly divided-to-downbeat on Netflix’s prospects — though it is also worth noting that the company’s shares have edged up about 10% over the past week in the lead-up to earnings. Michael Pachter of Wedbush Securities, who had for years been a noted naysayer, has turned positive on the company and now maintains an “outperform” rating on its stock. In a recent report, Pachter said Netflix bulls “have gone into hiding and bears have raised concerns about the impact of competition.” That combination spells opportunity, in his opinion.
“We think that Netflix is positioned to exceed its guidance for Q2,” he wrote, “particularly because of the staggered release date for Stranger Things 4, which has very strong viewership.” In other words, by saying it could lose up to 2 million subscribers, Netflix could “overdeliver” by losing 1 million and that could qualify as a victory in some corners.
Those non-binge rollouts for Stranger Things and Ozark helped limit churn toward the end of the quarter, Pachter continued, meaning that “once again, Netflix is likely positioned to grow. We do not expect wholesale changes to occur rapidly; we think Netflix will only gradually raise prices and roll out its ad-supported option. However, we think that the sooner the company shows its commitment to reducing churn by releasing its new content over several weeks, investors will see an uptick in net new subscribers and investor confidence in the Netflix business model will be restored.”
Goldman Sachs analyst Eric Sheridan finds no reason for such optimism. He recently downgraded shares of Netflix to “sell” and, like many of his peers, doesn’t see a turnaround anytime soon. “It remains clear that Netflix remains mired in a period of post-pandemic growth normalization while also seeing increased industry wide competition,” he wrote in a recent note to clients.
MoffettNathanson’s Michael Nathanson is similarly circumspect. He has maintained a “neutral” rating on the stock but just lowered his 12-month price target by $35 due to what he expects to be continuing turbulence. “We now expect greater pressure on subscriber growth in the back half of the year,” Nathanson wrote in a note to clients, in which he also trimmed third- and fourth-quarter forecasts for subscriber additions by 1 million per period.
Once Netflix leaves the stage Tuesday, dozens of other stakeholders in streaming will follow with their results over the next three to four weeks. All eyes are on Disney, which has added significant numbers of streaming subscribers but also just opted not to re-up IPL cricket rights, prompting some to predict the company will trim its five-year forecast for Disney+.
Twitter will report quarterly numbers while also waging legal battle with Elon Musk, whose $44 billion takeover melted down earlier this month. Other tech giants have shown rare vulnerability thus far in 2022, one reason stock markets had the worst first half of a year in more than five decades. Amazon is looking to inspire confidence under Andy Jassy, who took the CEO reins from Jeff Bezos a year ago but has presided over a bumpy period.
The downbeat view of streaming has hurt newer rivals like Paramount and Warner Bros Discovery. Fox Corp., even though it has intentionally avoided the direct-to-consumer subscription space, is contending with questions about the outlook for TV advertising.
Morgan Stanley analyst Ben Swinburne downgraded shares in Paramount to “underweight” (i.e., sell) and Fox to “equal-weight” (neutral). He cited three main factors: increasingly arduous economics in streaming; a dimming outlook for overall advertising, and two major new ad destinations elbowing into the market in Netflix and Disney; and Apple and Amazon muscling in on live sports.
Posing a question in the title of his note to clients — “The First Streaming Recession?” — Swinburne paints a fairly grim picture for the media sector. “The pivot to streaming has not reduced the risk to media estimates from a slowing economy,” he wrote. “Advertisers and consumers likely pull back in a recession.”
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