Netflix investors brace for subscriber losses as company grows long-term

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Netflix reports its second-quarter results on Tuesday, and the surge looks like a hurricane preparing. A storm is coming. It’s probably going to be bad. Shareholders pray that the foundation is strong enough to withstand damage.

Netflix remains the world’s biggest streaming service, but the company announced its first quarterly subscriber loss in more than a decade earlier this year and warned it expects to lose 2 million global subscribers in the second trimester. It would be the biggest quarterly loss in the company’s history.

It is possible that the losses will be even worse than expected. Macroeconomic trends are worrying. Worries about a possible recession and runaway inflation may already be dampening spending in the United States. Netflix’s standard US plan is $15.49 per month, which makes it more expensive than all the other major streaming services. This could make it the first option people write off when looking to save money.

Competition also continues to intensify. By the end of the year, HBO Max will likely add the full slate of content from Discovery+ to its service, which costs $14.99 per month or $9.99 with ads. Last week, Disney raised the price on ESPN+ by $3 to $9.99 per month, but kept its Disney+, Hulu, and ESPN+ bundle at $13.99 per month. This may lead to more customers for the Disney package, another potential alternative to Netflix.

“I do not know if [this quarter] will be bad, but it won’t be a good story,” said Andrew Rosen, former head of digital media at Viacom and founder of the PARQOR newsletter.

In early 2022, many analysts predicted that Netflix would add over 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 the bombshell last quarter, he lowered his full-year forecast to about 4 million.

The big question about Netflix stock performance after the earnings announcement will be how much of the bad news has already been priced in. 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 are going to be subscriber focused,” 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 the degree of deterioration they actually see and how far it goes in the future.”

weather the storm

As last quarter’s earnings conference call drew to a close, Netflix CFO Spencer Neumann stepped in to reassure investors positive growth would occur in the third and fourth quarters.

He said the projected loss of 2 million subscribers in the second quarter didn’t mean the losses would continue: “We’re going to grow revenue. And there will be growth in paid net additions,” he said. .

A still from the third season of “Stranger Things,” featuring the Hawkins team on the cusp of adulthood and facing foes old and new.

netflix

Netflix is ​​counting on a stronger content slate, including a new season of “The Crown” and the nearly $200 million budget action flick “The Gray Man,” starring Ryan Gosling and Chris Evans, to accelerate the growth. It will need to “overdeliver” in international regions — Latin America, Asia-Pacific and its Europe-Middle East-Africa unit — to account for growing headwinds in the United States and Canada, Rosen said.

Netflix also has a lot of advantages that other streamers don’t have. Primarily, it makes money, and all signs suggest that won’t change anytime soon. Most analysts predict net profit of nearly $5 billion this year. NBCUniversal’s Peacock, on the other hand, is expected to lose $2.5 billion this year. Even Disney, which has already added nearly 140 million Disney+ subscribers worldwide since its launch in late 2019, lost $887 million on its streaming products last quarter.

And with 222 million subscribers worldwide – at least before any official losses announced on Tuesday – Netflix remains the biggest streaming service on the planet. This is a big draw for any creator who wants to create content for the biggest audience possible. It’s also an important carrot for advertisers, who will finally be able to tap into Netflix’s viewership by the end of this year, when the company first launches an ad-supported subscription option.

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, including more than 30 million in the United States and Canada.

But the longer-term efforts won’t be visible just yet, and the main theme of Tuesday’s results could simply be damage control.

WATCH: Netflix investors still short-term focus on subscribers, says BMO’s Yung-Yu Ma

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