Netflix, after pulling itself out of a grueling series of setbacks in the first half of 2022, will face another test Thursday afternoon when it reports fourth-quarter financial results.
Along with kicking off the quarterly earnings season for media and entertainment companies, the report will usher in a year of increased scrutiny of the streaming business. Having moved mountains (and billions of dollars) to compete with Netflix after letting it outrun the streaming game for years, media companies are still very much at the beginning of their direct-to-consumer orientation process.
“Rather than being the new slice of bread, investors and executives have come to accept that streaming is actually not a good deal — at least compared to what came before it,” MoffettNathanson analyst Robert Fishman wrote in a note to clients this week. “But that pre-streaming era is long gone and isn’t coming back. If streaming is a mediocre business, what then? We are now in the streaming age.”
Netflix forecasts it will add 4.5 million new subscribers in the quarter and reach 227.6 million global subscribers. Even if it met that target, its holiday-quarter earnings would be the smallest since 2014. The company added 8.3 million for the comparable 2021 period.
Programming milestones throughout the quarter certainly, including meteoric success Wednesday, have the potential to increase subscribers. But earnings will be significantly down year-on-year, with analyst consensus calling for earnings of 44 cents a share, compared to $1.33 in the 2021 quarter. Earnings were also depressed, with Wall Street consensus rising from 7 $.8 billion was just a touch higher than $7.7 billion a year ago.
A major theme in the company’s most recent earnings report last October was that Netflix executives believed they were “on track to reaccelerate growth” after two disastrous declining quarters earlier in the year. Even so, the cost of content continues to weigh heavily. Netflix has said it’s keeping content spending steady at $18 billion a year, though for a go-go tech player, flat is the new minus.
Two key themes that are expected to feature prominently in the letter to shareholders and the executive video interview (Netflix version of the traditional conference call) are password sharing and advertising. After years of ignoring, or even winking at, the practice of sharing login credentials, the company has decided to no longer allow subscribers to do so at no additional cost. Co-CEO Ted Sarandos, speaking at a conference hosted by UBS in December, acknowledged that the company could face some complaints. “Consumers aren’t going to love it right away,” he said, “but we need to show them why they should see value.” Many Wall Streeters see an influx of billions of dollars in new revenue if the company is able to deliver to control the process effectively.
Advertising is similarly widely viewed as a contributor to revenue growth, even as the overall subscription earnings curve begins to flatten. Early indications of the progress of the cheaper subscription tier with ads — launched last November after a stunning reversal of the company’s longstanding anti-ad stance — are that its traction is minimal. From a financial standpoint, the mid-quarter launch in 12 territories was never expected to transform the quarter, but many ears will be listening intently for early descriptions of the effort.
Eric Sheridan, a veteran tech industry analyst at Goldman Sachs, described the launch of Netflix’s $7-month subscription business as “tentative” at best. In a note to customers, he questioned the magnitude of the benefit of the effort. “We expect a variety of big-brand advertisers to adopt the offer, but it’s not
The current framework (large minimum commitment, above-industry pricing, and limited measurement) may limit opportunities for ad dollars (without a broader base of users, greater measurement/attribution),” he wrote. “Additionally, we remain concerned that additional subscription offerings could cause users to break into the lowest-priced plans in a potential consumer recession over the next 6 to 12 months.”
Sheridan considers Netflix a “show me stock” and rates stocks as “sell.” Contrastingly, Cowen & Co.’s John Blackledge sees a “big publicity opportunity” as a catalyst for stocks. In a Cowen survey, Blackledge said a third of digital ad buyers said they plan to buy space on Netflix.
Netflix still has long-term subscriber growth potential, according to Blackledge, with incremental profit margins of 80% to 85%.
An investment firm known for years as a Netflix bear, Wedbush Securities, has turned bull. In a report this week, the firm’s Alicia Reese and Michael Pachter argue that the company is “well positioned in this grim environment as streamers shift strategy, and should be valued as an immensely profitable, slow-growing company.”
So far this year, investors seem poised to tune into the Netflix story. The company’s stock is up almost 13% so far in 2023 to close at $326.33 today.