By Jon Swartz
Netflix earnings preview: Wall Street expects subscriber decline to continue despite efforts to crack down on account sharing and add cheaper, ad-supported tier of streaming
Netflix Inc. is doing everything it can to reverse a recent subscriber exodus, but will it be enough? Investors will likely get a partial answer on Tuesday, when the company releases its second-quarter results.
In a tough time for tech stocks, none have been beaten more than the streaming giant, which suffered its first quarterly drop in subscribers in a decade to start the year, contributing to the shares’ 71% plunge. so far this year. Netflix (NFLX) has hemorrhaged subscribers as consumers switch between streaming services to watch their favorite shows, and it has lost mobile users, especially young women. Market researcher Global Wireless Solutions said Netflix lost 26% of young female mobile users between 2019 and 2022.
Its recent subscriber issues have accelerated a radical reinvention of Netflix – so far it has announced some 450 layoffs while pursuing an ad-supported platform, a crackdown on account sharing and new game content for increase revenue and reduce churn. The moves signal a shift in strategy forced by competition from streaming rivals Walt Disney Co. (DIS), Apple Inc. (AAPL), Warner Bros. Discovery Inc. (WBD), Paramount Global (PARA) and others, as well as the end of a pandemic-fueled growth spurt and the suspension of operations in Russia.
Despite the moves, Wall Street doesn’t expect Tuesday’s results to show an effect, despite the huge success of “Stranger Things”: Analysts polled by FactSet in early July expected subscriber drops of 1.72 million and 1.5 million over the next two quarters, respectively. And they didn’t expect an increase until the fourth fiscal quarter, when they expect Netflix to gain 5.27 million subscribers.
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Morgan Stanley analyst Benjamin Swinburne warns “rising macro headwinds” will force consumers to cut spending on streaming. In a July 12 note, it lowered its 2023 forecast for Netflix’s paid subscriber net additions to 7.9 million from 9.3 million, below the analyst consensus of 12 million. Swinburne sticks to a forecast of loss of 2 million subscriptions for the second quarter.
“We expect a net paid decline of 2 million, roughly in line with guideline, considering macro, competition and password sharing,” Cowen analyst John Blackledge added in a note dated July 8.
In April, Netflix said it would reverse a long-standing aversion to ads and offer a cheaper, ad-supported tier to customers after suffering heavy hits to subscriber numbers and inventory.
“We left a big segment of customers off the table, which was people who say, ‘Hey, Netflix is too expensive for me and I don’t mind advertising,'” the co-writer said. Netflix CEO Ted Sarandos at the Cannes Lions conference. in June. “We’re adding an ad tier; we’re not adding ads to Netflix like you know today. We’re adding an ad tier for people who say, ‘Hey, I want a lower price and I’ll watch ads.’
Read more: Netflix co-CEO Sarandos says streaming service is bringing ads to the platform
The company did not comment on reports it gathered with Alphabet Inc.’s Google (GOOGL) (GOOGL), Comcast Corp’s NBCUniversal. (CMCSA) and Roku Inc. (ROKU) to discuss potential advertising sales and marketing partnerships. Ultimately, he named Microsoft Corp. (MSFT) as a technology and business partner on Wednesday.
It has also been reported that Netflix is interviewing candidates to lead its advertising efforts and is looking to change its programming deals with major entertainment studios like Universal, Warner Bros. and Sony Pictures Television to put content on an ad-supported service. Netflix declined to comment on this information.
“We triangulated an ad-supported estimate” of approximately $1.4 billion in quarterly revenue, Piper Sandler’s Thomas Champion said in a July 5 note. Still, Champion considers Netflix a company “in transition” and has cut its price target on the stock to $210 from $293 while maintaining a neutral rating.
Netflix’s hard pivots to flip a few quarter dollars underscores how seriously its executives are tackling its problems — a refreshing course of action from a media company, according to Amagi Corp co-founder Srini KA. , a cloud-based company SaaS technology for broadcast and connected TV.
“It’s a smart and essential strategy to adapt to what the market and customers want”, KAtold MarketWatch.
“We’re in the early days of this evolution of viewing — the way people watch and consume television,” Sarandos said at Cannes. “Today we’re about 10% of what people do on TV and about 30% of streaming. We look at that and say there’s still a long time people are watching linear TV. You look at the growth of streaming as a percentage of the total, and there’s plenty of room to grow.”
Indeed, Netflix’s other CEO, Reed Hastings, said in June that the company would hire 1,500 people over the next 18 months.
What to expect
Earnings: Analysts polled by FactSet, on average, expect Netflix to report second-quarter earnings of $2.96 per share, up from $2.97 per share a year ago.
Contributors to Estimize – a crowdsourcing platform that collects estimates from Wall Street analysts as well as buy-side analysts, fund managers, business executives, academics and others – forecast earnings of $3. $05 per share on average.
Revenue: Analysts on average expect Netflix to post revenue of $8.03 billion in the second quarter, up from $7.34 billion a year ago. Estimate contributors predict $8.04 billion on average.
Stock movement: At the end of Thursday’s session, Netflix’s stock fell 71% this year – among the worst performers on the Nasdaq-100 – while the S&P 500 index was down 19%. Shares of Netflix have fallen 49% since the company reported its first quarter results.
What analysts say
Wall Street is generally convinced to bring a lower-cost ad service to Netflix. Financial analyst Blackledge said a Cowen survey suggests an ad-supported tier could add 4 million new members in 2023 and generate revenue per member of $17 per month. It maintains an outperform rating on Netflix shares. Matthew Thornton of Truist Securities estimates that an ad-supported model can add nearly $2 billion in revenue by 2025.
Significant obstacles remain, however. Scott Devitt of Stifel says affordability is “a barrier to subscriber growth outside of developed markets.”
“In many emerging markets where the [total addressable market] is relatively untapped, Netflix’s basic plan price is well over 1% of monthly revenue,” Devitt said in a July 1 note that maintains a holding rating on Netflix stock with a price target of $240. “Netflix can ease accessibility constraints through the development of lower-cost advertising packages while protecting average revenue per member. »
To complicate matters, Netflix is more likely to spin amid fierce competition that offers benefits it doesn’t, according to Needham’s Laura Martin, who sees Netflix shares as held without a price target.
“The bulk of NFLX subscribers also pay for other streaming services, which makes disconnecting from NFLX less disruptive,” Martin said in a July 1 memo. “We expect NFLX churn to increase relative to its SVOD competitors with” bundling options at Disney/Hulu/ESPN, Discovery+/HBO Max, Prime Video and Amazon.com Inc’s Paramount/Showtime (AMZN), plus news and sports programming on Peacock, Paramount+, Disney+ and Discovery+.
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