Netflix investors brace for subscriber losses as the company works on long-term fixes: Netflix publishes second-quarter earnings on Tuesday, and the buildup has the sense of hurricane preparation. A storm is on its way. It’s almost certainly going to be horrible. Shareholders are hoping that the foundation will be strong enough to resist the damage.
Netflix remains the world’s largest streaming service, but the business earlier this year recorded its first quarterly subscriber drop in more than a decade and warned that it expected to lose 2 million global members in the second quarter. That would be the company’s single largest quarterly loss in its history.
It is possible that the losses will be substantially worse than anticipated. The macroeconomic trends are concerning. Concerns about a potential recession and runaway inflation may already be limiting consumption in the United States. Netflix’s base package in the United States costs $15.49 per month, making it more expensive than all other major streaming providers. As a result, it may become the first option individuals drop when looking to save money.
Competition is also increasing. HBO Max, which costs $14.99 per month or $9.99 with advertising, is expected to add Discovery+’s entire content slate by the end of the year. Disney raised the monthly pricing of ESPN+ by $3 to $9.99 last week but retained the bundled offering of Disney+, Hulu,, and ESPN+ at $13.99.
“I’m not sure if [this quarter] will be bad, but it won’t be a good tale,” said Andrew Rosen, founder of streaming newsletter PARQOR and a former Viacom digital media executive.
Many analysts predicted that Netflix would attract more than 20 million new customers this year at the start of 2022. JP Morgan analyst Doug Anmuth forecast in April that the firm would add 17.95 million jobs in 2022. Following last quarter’s surprise, he reduced his full-year forecast to around 4 million.
The main question regarding how Netflix shares behave after the results are out is how much of the negative news has already been priced in. Already, Netflix’s market capitalization has dropped from $300 billion to less than $90 billion.
“For the time being, I believe the markets will be focused on subscribers,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, told CNBC on Monday. “I believe there is a wide range of probable outcomes in terms of how much degeneration they really notice and how far into the future it goes.”
Weathering the storm
As the third quarter earnings conference call came to a close, Netflix Chief Financial Officer Spencer Neumann jumped in to reassure investors that strong growth will occur in both the third and fourth quarters.
“We will grow revenue,” Neumann stated, despite the predicted loss of 2 million members in the second quarter. “There will also be compensated net add growth,” he predicted.
Netflix expects a stronger slate of content to fuel growth, including a new season of “The Crown” and the almost $200 million action film “The Gray Man,” starring Ryan Gosling and Chris Evans. To compensate for rising headwinds in the United States and Canada, it will need to “overdeliver” in overseas markets such as Latin America, Asia Pacific,, and its Europe-Middle East-Africa segment, according to Rosen.
Netflix also has advantages that other streaming services do not. Its primary purpose is to make money, and all indications indicate that this will not change very soon. This year, most analysts estimate a a net income of about $5 billion. NBCUniversal’s Peacock, on the other hand, is expected to lose $2.5 billion this year. Even Disney, which has attracted over 140 million Disney+ users worldwide since its launch in late 2019, lost $887 million last quarter from its streaming offerings.
And, with 222 million users worldwide — at least before any formal losses were disclosed Tuesday — Netflix remains the world’s largest streaming service. That’s a significant lure for any content provider who wants to reach the widest potential audience. It’s also a huge carrot for marketers, who will be able to tap into Netflix’s audience for the first time this year when the business debuts an ad-supported subscription option.
Netflix also intends to cut down on password sharing around the world, which might result in tens of millions of new members over time. Netflix claims that more than 100 million households worldwide do not pay for Netflix, including more than 30 million of them in the United States and Canada.
Longer-term measures, though, will take time to bear fruit, and the main theme of Tuesday’s results may simply be damage management.
Netflix shares increased 1% to $190.92 on Monday, but are down more than 68 percent year to date.