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Earnings Outlook: Netflix is pulling out all the stops to reverse a slide in subscribers

Netflix Inc. is pulling out all the stops to reverse a recent exodus of subscribers, but will it be enough? Investors are likely to get a partial answer on Tuesday, when the company releases its second-quarter results.

In a dire time for tech stocks, none has been battered more than the streaming giant, which suffered its first quarterly decline in subscribers in a decade to start the year, contributing to the stock cratering 71% so far this year. Netflix
NFLX,
+8.20%

has hemorrhaged subscribers to churn, as consumers bounce from one streaming service to the next to view their favorite programs, and it has lost mobile users — in particular, young women. Market researcher Global Wireless Solutions said Netflix lost 26% of young, female mobile users between 2019 and 2022.

Its recent subscriber woes 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 gaming content to pump up revenue and cut down on churn. The moves signal a shift in strategy forced by competition from streaming rivals Walt Disney Co.
DIS,
+3.66%
,
Apple Inc.
AAPL,
+1.15%
,
Warner Bros. Discovery Inc.
WBD,
+2.42%
,
Paramount Global
PARA,
+3.65%

and others, as well as the end of a pandemic-fueled surge in growth and the suspension of operations in Russia.

Despite those 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 drops in subscribers of 1.72 million and 1.5 million in the next two quarters, respectively. And they didn’t foresee an increase until the fiscal fourth quarter, when they expect Netflix to gain 5.27 million subscribers.

Don’t miss: ‘Stranger Things’ split season’s success may have saved Netflix, so expect to see it a lot more

Morgan Stanley analyst Benjamin Swinburne cautions “rising macro headwinds” will force consumers to pare streaming spending. In a July 12 note, he lowered his 2023 forecast for Netflix’s net paid subscriber additions to 7.9 million from 9.3 million, below analyst consensus of 12 million. Swinburne is sticking with a prediction of a loss of 2 million subscriptions for the second quarter.

“We expect a paid net decline of 2 million, roughly in line with guide, given macro, competition, & password sharing,” Cowen analyst John Blackledge added in a note July 8. 

In April, Netflix indicated it would reverse a longstanding aversion to ads and offer a cheaper, ad-supported tier to customers after suffering blows to subscriber numbers and its stock.

“We’ve left a big customer segment off the table, which is people who say, ‘Hey, Netflix is too expensive for me and I don’t mind advertising,’” Netflix co-CEO Ted Sarandos said at the Cannes Lions conference in June. “We adding an ad tier; we’re not adding ads to Netflix as you know it today. We’re adding an ad tier for folks 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 platform

The company had no comment on reports it huddled with Alphabet Inc.’s
GOOGL,
+1.28%

GOOG,
+1.19%

Google, Comcast Corp.’s
CMCSA,
+3.34%

NBCUniversal and Roku Inc.
ROKU,
+4.17%

to discuss potential ad sales and marketing partnerships. Ultimately, it tabbed Microsoft Corp.
MSFT,
+1.04%

as a technology and sales partner on Wednesday.

There have also been reports that Netflix is interviewing candidates to lead its advertising efforts as well as seeking to amend its programming deals with major entertainment studios like Universal, Warner Bros. and Sony Pictures Television to put content on an ad-supported service. Netflix has declined to comment on those reports.

“We’ve triangulated an ad-supported estimate” of about $1.4 billion in quarterly revenue, Piper Sandler’s Thomas Champion said in a note on July 5. Still, Champion sees Netflix as a company “in transition,” and slashed his price target on the stock to $210 from $293 while maintaining a neutral rating.

Netflix’s hard pivots to reverse a couple of bum quarters underscore the seriousness with which its executives are addressing its problems — a refreshing course of action from a media company, according to Srini KA, co-founder of Amagi Corp., a cloud-based SaaS technology for broadcast and connected TV.

“It is a smart, essential strategy to adapt to what the market and customers want,” KAtold MarketWatch.

“We’re in the early days of this evolution of watching — the way that people watch and consume television,” Sarandos said in Cannes. “Today, we’re about 10% of what people do on TV, and about 30% of the streaming. We look at that and say there’s still a lot of time that people are watching linear TV. You look at the growth of streaming as a percentage of total, and there’s a lot of room to grow.”

Indeed, Netflix’s other CEO, Reed Hastings, in June said the company would hire 1,500 people in the next 18 months.

What to expect

Earnings: Analysts surveyed by FactSet expect, on average, Netflix to report second-quarter earnings of $2.96 a share, equal to $2.97 a share a year ago.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of $3.05 a share on average.

Revenue: Analysts on average expect Netflix to report $8.03 billion in second-quarter revenue, up from $7.34 billion a year ago. Estimize contributors predict $8.04 billion on average.

Stock movement: As of the end of Thursday’s session, Netflix’s stock has plummeted 71% this year — among the worst Nasdaq-100 
NDX,
+1.83%

performers — while the S&P 500 index
SPX,
+1.92%

has declined 19%. Shares of Netflix have plunged 49% since the company announced first-quarter results.

What analysts are saying

Wall Street is generally sold on bringing 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 a month. He maintains an outperform rating on Netflix shares. Matthew Thornton of Truist Securities estimates an ad-supported model can add nearly $2 billion to revenue by 2025.

Significant obstacles remain, however. Stifel’s Scott Devitt 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 is priced at well over 1% of monthly income,” Devitt said in a July 1 note that maintains a hold rating on Netflix shares with a price target of $240. “Netflix can alleviate affordability constraints through the development of lower-cost advertising plans while still protecting average revenue per member.”

Complicating matters, Netflix is more susceptible to churn amid ferocious competition that offers advantages it doesn’t, according to Laura Martin of Needham, who rates Netflix shares as hold with no price target.

“The bulk of NFLX subscribers also pay for other streaming services, making it less disruptive to disconnect NFLX,” Martin said in a July 1 note. “We expect NFLX’s churn to rise vs. its SVOD competitors owning” to bundling options at Disney/Hulu/ESPN, Discovery+/HBO Max, Amazon.com Inc.’s
AMZN,
+2.64%

Prime Video and Paramount/Showtime, as well as news and sports programming on Peacock, Paramount+, Disney+ and Discovery+.

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