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On Tuesday, Netflix reports its second-quarter earnings, and it’s like preparing for a hurricane. The storm is coming. It will probably be bad. Shareholders are praying that the foundation will be strong enough to withstand the damage.
Netflix remains the world’s largest streaming service, but earlier this year the company reported its first quarterly loss of subscribers in more than a decade and warned it expected to lose 2 million subscribers worldwide in the second quarter. This will be the biggest quarterly loss in the history of the company.
Perhaps the losses will be even greater than expected. Macroeconomic trends are worrisome. Fears of a possible recession and runaway inflation may already be slowing down US spending. The standard Netflix plan in the US is $15.49 per month, making it more expensive than all the other major streaming services. This could make it the first option people cancel when they want to save money.
The competition also continues to grow. By the end of the year, HBO Max will likely add the entire Discovery+ content bundle to its service, which costs $14.99 a month or $9.99 with ads. Last week, Disney increased the price of ESPN+ by $3 to $9.99 per month, but kept the bundled offer of Disney+, Hulu, and ESPN+ at $13.99 per month. This could lead to more buyers of the Disney package, another potential alternative to Netflix.
“I don’t know if [this quarter] it’s going to be bad, but it’s not going to be a good story,” said Andrew Rosen, former head of digital media at Viacom and founder of streaming newsletter PARQOR.
In early 2022, many analysts predicted that Netflix would add over 20 million new subscribers this year. Back in April, JP Morgan analyst Doug Anmuth estimated that the company would add $17.95 million in 2022. After a stunning last quarter, he lowered his full-year forecast to around $4 million.
The big question about how Netflix’s stock performs after the results are announced will be how much bad news is already factored into the stock price. Netflix’s market valuation has already gone from $300 billion to less than $90 billion in less than a year.
“At this point, 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 into the future it will go.”
As last quarter’s earnings conference call drew to a close, Netflix CFO Spencer Neumann stepped in to reassure investors of positive growth in the third and fourth quarters.
He said that the projected loss of 2 million subscribers in the second quarter does not mean that losses will continue: “We will increase revenue. And there will be paid net growth in value added,” he said.
A scene from the third season of Stranger Things, where the Hawkins team is on the threshold of adulthood and faces old and new enemies.
Netflix is counting on a stronger set of content, including a new season of The Crown and a nearly $200 million-budget action movie The Gray Man starring Ryan Gosling and Chris Evans, to boost growth. Rosen said he would need “oversupply” in international regions – Latin America, Asia-Pacific and its Europe-Middle East-Africa subdivision – to account for increasing headwinds in the US and Canada.
Netflix also has a lot that other streamers don’t. First of all, it brings money, and everything indicates that this will not change in the near future. Most analysts are forecasting a net income of nearly $5 billion this year. Peacock, owned by NBCUniversal, by contrast, will 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 were announced on Tuesday – Netflix is still the biggest streaming service on the planet. This is a big advantage for any creator who wants to create content for the largest possible audience. It’s also an important carrot for advertisers, who will finally be able to connect with Netflix’s audience by the end of this year, when the company first launches an ad-supported subscription option.
Netflix also plans to stop password sharing worldwide, 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 in the US and Canada.
But long-term efforts are yet to materialize, and the main theme of Tuesday’s results may simply be damage control.
WATCH: Netflix investors remain focused on subscribers in the short term, says BMO’s Jung-Yu Ma.
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