Netflix Earnings Are Coming. Subscriber Growth Is Still a Worry.

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Netflix projected it would lose two million subscribers in the second quarter. Its offerings include teen dramedy “Never Have I Ever.”

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Isabella B. Vosmikova/ NETFLIX

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Netflix shares are down nearly 70% in 2022, with most of that decline triggered by a first quarter earnings report that featured truly alarming second quarter guidance.

And now the second quarter earnings report is upon us, due after the close Tuesday.

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In reporting first quarter results, Netflix (ticker: NFLX) announced an unexpected loss of 200,000 net new subscribers—and even worse, projected it would lose two million more in the second quarter.

That result was so shocking that it spurred founder and co-CEO Reed Hastings to announce on the first quarter earnings call that the company has decided to develop an advertising-supported subscription tier. That was a radical change, completely reversing a previous steadfast opposition to including advertising on the platform.

Hastings also said the company intends to take steps to reduce password sharing—the company thinks millions of households are watching Netflix while paying not a penny.

Netflix projected second quarter revenue of $8.05 billion, with profits of $3 a share; Street consensus estimates aren’t far off, at $8.04 billion, and $2.96 a share. For the September quarter, the Street sees $8.11 billion in sales, and profits of $2.77 a share.

The big content news in the second quarter was the debut of Stranger Things Season 4, which has been the second-most watched series on Netflix ever, trailing only Squid Game. But whenever Netflix reports results, the Street’s primary focus is on subscriber trends, and there is little evidence that the new adventures of the kids from Hawkins drove a change in the outlook for new subscribers.

This time around, investors will also be looking to hear updates on the company’s advertising plans—last week, the company made the surprise announcement that it has signed up Microsoft as a partner to help launch the advertising strategy.

The Wall Street Journal and others had speculated that Google or Comcast were the most companies to join hands with Netflix, but both will arguably be competing for Netflix for TV ad dollars, while Microsoft won’t.

In a research note previewing the quarter, UBS analyst John Hodulik on Friday trimmed his earnings estimates for this year, next year and the year after, and warned that guidance is likely to be conservative. He thinks Q2 subscriber growth will be in line with guidance, down two million. But he sliced ​​his third quarter growth forecast to 1.3 million net adds, down from 2.8 million, and below the Street consensus at 1.9 million, reflecting ongoing macroeconomic issues.

Meanwhile, Hodulik cautions that “efforts to crack down on account sharing and the new ad-supported tier could enhance financials, but will likely take 1-2 years to play out.”

He expects 2023 subscriber growth of 9.5 million, with the new ad-tier helping, but with intensifying competition and pressure on consumer spending as potential offsets. “We see Netflix as a long-term secular leader, but visibility into re-accelerating growth is low, keeping us neutral,” he writes.

Evercore ISI analyst Mark Mahaney has similar concerns. He thinks current Street subscriber estimates for both the June and September quarters are reasonable, but some potential downside from ongoing macro softness, competitive content releases and a relatively front-end loaded Q3 from a content perspective. Mahaney keeps his In Line rating and $245 target price, but he’s a little more upbeat about the long term.

“While we see limited catalysts for the stock near term, we see the rollout of an ad-tier as a potential medium-term catalyst that should drive churn improvement and potentially reaccelerate sub adds,” he writes.

Write to Eric J. Savitz at [email protected]


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