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Netflix’s earnings results mark pivot point for streaming giant, for better or worse


Netflix co-founder and CEO Reed Hastings attends the red carpet for the Netflix launch event at Palazzo Del Ghiaccio on October 22, 2015 in Milan, Italy.

Jacopo Raule | beautiful pictures

NetflixOur second-quarter earnings results can be interpreted in two very different ways. The future of the company depends on which reading is correct.

The world’s largest streaming company announced Tuesday that it lost nearly 1 million subscribers in the three-month period from April to June, marking the second consecutive quarter it lost customers. However, that was less than the $2 million loss the company had forecast, and Netflix stock was up about 6% at $214 in midday trading Wednesday.

The second-quarter results present a new bullish case for Netflix investors. If this quarter is the “bottom” – the time when Netflix stops losing subscribers and starts growing again, even if at breakneck speed – then investors will have a new growth story. In the next quarter, Netflix forecasts that it will add 1 million subscribers. This could be the main reason stocks are up on Wednesday.

“With signs of stabilization in the subscriber base emerging, we believe the prospect of prolonged subscriber loss becomes increasingly unlikely,” said Stifel analyst Scott Devitt. Stifel’s Scott Devitt said. Stifel upgraded its rating on Netflix stock to “buy” on Wednesday.

But results that some investors find good enough, which may lead to only temporary relief. The notable case for Netflix is ​​that Wednesday’s rise in stock value was a “dead cat bounce” — Wall Street’s term for a temporary bounce after a significant drop. Netflix faces increasing competition from major players pushing into the streaming market, including Disney’s Disney+, NBCUniversal’s Peacock and HBO Max. That has raised questions about whether Netflix can maintain its dominant position, especially in the lucrative US market.

New case for development

In the past, Netflix’s bulls have leaned toward the view that the company will turn its massive global scale of 221 million subscribers into positive free cash flow by raising prices and reducing hiatuses. This transformation from a losing business to a free cash flow machine will enrich shareholders.

That has now happened, or, at least, is about to happen. Netflix said in its shareholder letter that it will generate $1 billion in free cash flow for 2022. In 2023, Netflix said there will be “significant growth” in free cash flow.

And yet, Netflix stock is still trading 70% below its all-time high set in November.

A second wave of subscriber growth could be the company’s new story for investors. There is reason to believe that Netflix subscribers will once again skyrocket. Netflix announced it will stop sharing passwords and roll out a cheaper ad-supported tier in 2023. Both of those initiatives could lead to more signups.

End of its heyday

If Netflix’s subscriber growth doesn’t pick up speed again, the second quarter of 2022 will be an inflection point when it’s clear the company’s business days are over.

Needham analyst Laura Martin writes: “Where will its side losses end, in the face of strong competition from newer, lower-priced, deeper-pocketed streaming services?” “222 million global subscribers could become the highest number of subscribers for Netflix.”

This could prove to be true if Netflix can’t turn enough of its password sharers into long-term paying subscribers. Netflix said in its shareholder That mail was encouraged by its early studies from trials in Latin America that it could convert password-sharers into paying customers.

On Tuesday’s conference call, Netflix CFO Spencer Neumann said the company plans to spend about $17 billion on content by 2022 and will stay within that “area code” for the “next few years.” . That’s a change from nearly every year over the past decade, when Netflix has increased its content spending to build its market share. As revenue growth slows, Neumann acknowledges spending on new programs will also moderate.

“Our content costs will continue to grow, but will be more moderated as we adjust to increase revenue,” said Neumann.

It remains to be seen whether Netflix can continue to grow its subscriber base without its consistently skyrocketing content budget — especially since the company typically raises prices every year. Worries are especially evident in the US and Canada, where Netflix lost 1.3 million subscribers in the second quarter, marking the third quarter of the past five years as its customer base declined.

“Given the risk of increasing uncertainty with each rally from here, the real worry is that the company will find it difficult to pick up speed again in terms of the upside,” said Michael Nathanson, an analyst at research firm MoffettNathanson. material in these areas”.

In the years to come, investors can look back to the second quarter of this year as the moment when Netflix began its second growth action or its slow move into a value stock.

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