When Netflix reports second-quarter results Tuesday, the key barometer for Wall Street will be whether the streamer will overdeliver on already low expectations — or, like the Indiana town that’s the centerpiece of “Stranger Things,” it will get sucked deeper into a pit of despair.
Netflix projected a net loss of 2 million streaming subscribers for the second quarter, following a surprise decline of 200,000 in Q1 (which included the loss of 700,000 Russian customers after exiting the country over the invasion of Ukraine). The company is scheduled to report Q2 2022 results after market close July 19.
At least one analyst thinks Netflix will beat sub guidance for Q2 — driven by “Stranger Things 4,” which has seen significant viewership, to become the most-watched English-language original series in its first month of release (according to Netflix’s proprietary measurement).
Wedbush Securities analyst Michael Pachter, once notably bearish on Netflix, projects a narrower Q2 net loss of 1.5 million subscribers and that company will forecast a gain globally of at least 1 million.
What made the difference? Pachter was encouraged by Netflix’s deviation from its binge-release practice with the highly Season 4 of “Stranger Things”: The first seven eps were released May 27 (to spur signups and reduce churn in Q2) with the two concluding segments dropping July 1 (so they would fall in Q3).
“While it is possible that the company will once again issue downbeat guidance for Q3, we think that the staggered release dates [of ‘Stranger Things 4’] limited churn at quarter end and once again, Netflix is likely positioned to grow,” Pachter wrote, adding that “we think that the sooner the company shows its commitment to reducing churn by releasing its new content over several weeks, investors will see an uptick in net new subscribers and investor confidence in the Netflix business model will be restored.”
However, Pachter doesn’t believe Netflix’s share price will approach 2021 levels “for many years,” although he thinks a 12-month target of $280/share is “achievable.” The stock closed last Friday at $189.11/share.
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To be sure, in 2022, the financial markets have given their verdict on Netflix. The honeymoon is over for its status as a high-flying “growth” stock: Shares are down 68% year to date, with investors souring on the company’s slowing growth amid competition from a raft of powerful rivals — and soaring inflation rates.
Netflix could suffer from near-term “stream-cutting” as inflation continues to tear a hole in households budgets. “Streaming video revenues may prove more vulnerable than expected to a global recession and lower consumer spending levels,” Morgan Stanley’s Ben Swinburne wrote in note last week. “While Netflix’s leading engagement should help it retain customers, its relative price premium is likely an offset as consumers look to trim their streaming bill.”
While subscriber-growth trends are still a focus for investors, as Netflix’s business matures, revenue-per-subscriber (ARPU) is shifting “from a secondary to a primary driver,” according to Swinburne. He expects Netflix to continue raising prices in the years ahead but cautioned that it’s possible the market “sees greater elasticity of demand in the future than it has historically, as there are many more streaming options worldwide for consumers to choose from… and Netflix carries a premium price.”
A major strategic imperative given Netflix’s slowdown is its embrace — at long last — of advertising. Last week, Netflix announced that it had selected Microsoft as its partner for the new ad-supported tier, which the company has been aiming to launch in the fourth quarter. Microsoft beat out NBCUniversal and Google for the Netflix deal. Investors viewed the development positively, but numerous questions remain — including what Netflix will charge for the plan with ads, and what kind of ad load it will go out with.
Netflix could charge $10/month in the U.S. for the ad-based plan, which could generate $7/month/subscriber in advertising revenue, according to numbers crunched by Swinburne’s team: “Netflix can ultimately use high ad ARPUs to meaningfully lower its price point to consumers.”
Netflix’s ad-based plan could result in Netflix adding 4.3 million incremental U.S./Canada subs in 2023 and generating “significant upside” to revenue, Cowen analyst John Blackledge wrote in a July 8 research note. Cowen’s latest model projects Netflix hitting 239.7 million subs (gaining 10.1 million) in ’23, up from 229.5 million (+7.7 million) at the end of ’22.
The stock’s year-to-date decline “has led to more attractive valuation” ahead of Netflix’s ad-supported tier rollout, Blackledge told clients.
Meanwhile, Netflix’s spending on content is expected to be flat or slightly down for full-year 2022. The streamer spent $17.5 billion in cash content cost last year; Cowen’s analyst estimate Netflix will spend $17.4 billion this year — noting that the figure is still up sharply from $12.5 billion in 2020 when productions were halted globally because of the COVID pandemic.
Pictured above: Millie Bobby Brown, Matthew Modine in “Stranger Things 4”
