Netflix reports second-quarter earnings on Tuesday, and the rerun looks like hurricane preparation. A storm is coming. It will probably be bad. Shareholders are praying the foundation is strong enough to withstand the damage. Netflix remains the world’s biggest streaming service, but the company reported its first quarterly loss in subscribers in more than a decade earlier this year 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 worse than predicted. Macroeconomic trends are worrying. Concerns about a potential recession and rampant inflation may already be slowing spending on US Netflix’s $15.49-a-month regular plan, making it more expensive than all the other major streaming services. This could make it the first option people cancel when looking to save money. Competition also continues to grow. By the end of the year, HBO Max will likely add all of Discovery+’s content to its service, which costs $14.99 a month or $9.99 with ads. Disney last week raised the price on ESPN+ by $3 a month to $9.99, but kept its bundled offering of Disney+, Hulu and ESPN+ at $13.99 a month. This may lead to more customers for the Disney package, another possible alternative to Netflix. “I do not know if [this quarter] it’s going to be bad, but it’s not going to be a good story,” said Andrew Rosen, a former Viacom digital media executive and founder of streaming newsletter PARQOR. In early 2022, many analysts predicted that Netflix would add more than 20 million new subscribers this year. As recently as April, JP Morgan analyst Doug Anmuth estimated the company would add 17.95 million in 2022. After last quarter’s bombshell, he lowered his full-year forecast to about 4 million. The big question for Netflix’s stock performance after the results will be how much of the bad news has already been baked into the stock price. Already, Netflix’s market valuation has fallen from $300 billion to less than $90 billion in less than a year. “For now, I think the markets will be focused on subscribers,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, told CNBC on Monday. “I think there’s a wide range of possible outcomes in terms of how much deterioration they actually see and how far it will go in the future.”
Weathering the storm
As last quarter’s earnings call came to a close, Netflix Chief Financial Officer Spencer Neumann stepped in to reassure investors that there will be positive growth in both the third and fourth quarters. Neumann said the projected loss of 2 million subscribers in the second quarter does not mean the losses will continue: “We will grow revenue. And there will be net growth in paid,” he said. A still from the third season of “Stranger Things,” with the Hawkins crew on the brink of adulthood and facing enemies old and new. Netflix Netflix is relying on stronger content, including the new season of “The Crown” and the nearly $200 million budget action film “The Gray Man,” starring Ryan Gosling and Chris Evans, to accelerate growth. It will need to “outperform” in international regions – Latin America, Asia-Pacific and the Europe-Middle East-Africa unit – to account for growing headwinds in the US and Canada, Rosen said. Netflix also has a lot of things that other streamers don’t. Mostly, it makes money, and all signs point to that not changing anytime soon. Most analysts forecast net income of nearly $5 billion this year. NBCUniversal’s Peacock, by contrast, is set to 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 official losses were announced Tuesday — Netflix is still the biggest streaming service on the planet. This is a big draw for any creator who wants to create content for the largest possible audience. It’s also a major carrot for advertisers, who will finally be able to tap into Netflix’s audience by the end of the year, when the company launches an ad-supported subscription option for the first time. Netflix also plans to crack down on password sharing around the world, a process that could add tens of millions of new subscribers over time. Netflix estimates that more than 100 million households worldwide do not pay for Netflix, with more than 30 million of those in the US and Canada. But longer-term efforts won’t even be seen, and the main theme of Tuesday’s results may just be damage control. Shares of Netflix rose 1% on Monday to $190.92 and are down more than 68% year to date. BEWARE: Netflix investors still short-term focused on subscribers, says BMO’s Yung-Yu Ma
