On Tuesday afternoon, Netflix will announce its financial results for the second quarter. The results are anticipated to set the tone for one of the most tense and unpredictable earnings seasons in years.
summarized from deadline.com: According to Guggenheim analyst Michael Morris, the research would have “wide-ranging consequences for the stock and the media ecosystem.”
Although it still leads the streaming market with nearly 222 million users globally, Netflix last quarter issued a warning about its second-quarter performance, stating that it may lose as many as 2 million subscribers. Investors punished the company’s shares in April of last year after it saw its first subscriber losses in more than a decade. The stock had already dropped from its all-time high in 2021. Two-thirds of the company’s market worth have been lost during the last six months. Wall Street has been closely examining the unexpected subscriber plateau as well as the popularity of streaming competitors, including deep-pocketed tech rivals like Apple and Amazon as well as previous content providers like Disney, Warner, and NBCUniversal.
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When Netflix enters the limelight, a few topics in particular will take center stage: the subscriber narrative, updates on the launch of a less expensive, ad-supported tier, and initiatives to stop free password sharing. The corporation bragged about the latter two measures last quarter, but the company’s about-face on advertising after years of adamantly stating that it would never take advertisements left many observers perplexed, especially considering the hurried and disjointed manner in which it was announced.
(The shocking announcement was made by Netflix’s co-founder and co-CEO Reed Hastings during the company’s video results session, but there was nothing in writing in Netflix’s quarterly letter to shareholders. At the Cannes Lions festival this month, co-CEO Ted Sarandos presented with a smoother message. The firm also signed a deal with Microsoft, which will purchase AT&T’s ad-tech startup Xandr in 2021.
Another strategic focus is programming spending. Netflix is heading toward the $20 billion annual cap, but its executives have recently signaled some moves toward moderation. Scott Stuber, the head of the company’s film division, told The New York Times in a story published today that the company will continue to shoot big-budget productions like the Russo Bros. spy thriller The Gray Man, which is currently in theaters and will be released Friday. “We’re not frantically reducing our spending, but we are reducing the volume,” Stuber explained. “We’re trying to be more thoughtful.”
Despite such attempts to assuage Wall Street’s concerns, analysts are increasingly divided on Netflix’s prospects – though it’s worth noting that the company’s shares were up nearly 10% last week ahead of earnings. Wedbush Securities’ Michael Pachter, who has been negative for years, remains positive on the company and currently maintains an “outperform” rating on the stock. In a recent report, Pachter said Netflix bulls are “going into hiding and bears are voicing concerns about the impact of competition.” According to him, this combination means opportunity.
“We think Netflix is positioned to exceed its expectations for Q2,” Pachter wrote, “especially due to the staggered release date of Stranger Things 4, which has a very strong audience.” In other words, Netflix, which said it could lose up to 2 million subscribers, could “overdeliver” by losing 1 million, which could be characterized as a victory in some corners.
According to Pachter, the non-binge rollouts of Stranger Things and Ozark helped reduce churn near the end of the quarter, which means that “Netflix is probably positioned to expand. We do not anticipate significant changes to happen overnight; rather, we believe Netflix will gradually raise its fees and provide its ad-supported alternative. However, we believe that the sooner the business demonstrates its dedication to lowering churn by rolling out its new content over a number of weeks, the sooner investors will notice an increase in net new subscribers and the sooner investor trust in the Netflix business model will be restored.
Eric Sheridan, an analyst at Goldman Sachs, finds no justification for this confidence. Like many of his colleagues, he just downgraded shares of Netflix to “sell,” and he doesn’t anticipate a recovery any time soon. In a recent letter to clients, he stated, “It is evident that Netflix remains trapped in a period of post-pandemic growth normalization while simultaneously facing greater industry wide rivalry.”
Michael Nathanson of MoffettNathanson is similarly cautious. He maintained his “neutral” rating on the stock but lowered his 12-month price target to $35 due to turbulence he expects to continue. “We now expect greater pressure on subscriber growth in the second half of the year,” Nathanson said in a note to clients, also cutting his third and fourth quarter subscriber count estimates by 1 million per period.
When Netflix leaves the stage on Tuesday, dozens of other stakeholders in the streaming space will also release their results over the next three to four weeks. All eyes are on Disney, which added a significant number of streaming subscribers but also opted not to re-extend its IPL cricket rights, leading some to predict the company will trim its five-year forecast for Disney+.
Twitter will release its quarterly numbers while continuing its legal battle with Elon Musk, whose $44 billion takeover deal fell through earlier this month. Other tech giants have shown rare vulnerability so far in 2022, which is one of the reasons why stock markets had their worst first half of the year in more than five decades. Amazon is struggling to inspire confidence under Andy Jassy, who took over as CEO from Jeff Bezos a year ago but has presided over a bumpy ride.
The negative view of broadcasting has hurt new competitors such as Paramount and Warner Bros. Discovery. Fox Corp. is struggling with questions about the outlook for TV advertising, although it has consciously avoided the direct-to-consumer subscription space.
Morgan Stanley analyst Ben Swinburne downgraded Paramount shares to “underweight” (i.e. sell) and Fox shares to “equal-weight” (neutral). Swimburn cited three main factors: an increasingly difficult economy in broadcasting; a bleak outlook for general advertising and two big new ad targets elbowing their way into the market in Netflix and Disney; and Apple and Amazon’s entry into live sports.
The first streaming recession? is what the title of his message to clients asks. Swinburne presents a really dismal image of the media industry. A weakening economy still poses a risk to media projections, he noted, notwithstanding the shift to streaming. In a downturn, advertisers and consumers are inclined to cut back.
