Netflix Reed Hastings Co-founder and CEO will attend the netflix launch red carpet at Palazzo Del Ghiaccio on October 22, 2015 in Milan, Italy.
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NetflixThe second quarter earnings results can be interpreted in two very different ways. The future of your company depends on which reading is correct.
The world’s largest streaming company announced on Tuesday that it lost nearly one million subscribers and lost customers for the second consecutive quarter in the three months from April to June. Still, that’s less than the company’s projected loss of $ 2 million, with Netflix’s share price rising about 6% to $ 214 on Wednesday noon trading.
The second quarter results provide Netflix investors with a new bullish case. Investors have a new growth story if the quarter acts as a “bottom” (even at the snail’s pace, when Netflix stops losing subscribers and begins to grow again). Netflix expects to add one million subscribers in the next quarter. This may be the main reason why stock prices rose on Wednesday.
“There are signs of a subscriber-based stabilization, and it’s less likely that subscriber losses will be prolonged,” Stiffel analyst Scott David said in a note to customers. I think there is. ” Stifel upgraded its Netflix stock rating to “buy” on Wednesday.
However Results that some investors felt good enough, May lead to temporary relief. Netflix’s bare case is that Wednesday’s stock price surge is a “dead cat bounce.” This is Wall Street’s term for a temporary recovery after a significant fall. Netflix faces fierce competition from major players entering the streaming market, such as Disney + from Disney, Peacock from NBCUniversal, and HBO Max. This raises questions about whether Netflix can maintain its advantage, especially in the profitable US market.
Previously, Netflix bulls were obsessed with the idea that the company would turn its huge global reach of 221 million subscribers into positive free cash flow by raising prices and reducing churn. This shift from a money-losing venture to a free cash flow machine will enrich shareholders.
It’s happening now, or at least it’s likely. Netflix said in a shareholder letter that it will generate $ 1 billion in free cash flow in 2022. In 2023, Netflix said free cash flow would be “significantly increased.”
Still, Netflix’s share price is trading 70% below the all-time high set in November.
The second wave of subscriber growth could be the company’s new story for investors. There is reason to believe that Netflix subscribers will surge again. Netflix has cracked down on password sharing and announced that it will launch a cheaper ad support hierarchy in 2023. Both of these initiatives can lead to more registrations.
If Netflix subscriber growth doesn’t accelerate again, the second quarter of 2022 will serve as a turning point when it becomes clear that the company’s half-century is over.
“Where does that sub-loss end given the fierce competition from new, low-priced, deep-pocket streaming services,” said Needham analyst Laura Martin. “222 million global subscribers could be Netflix’s peak subscribers.”
This may be the case if Netflix is unable to turn a sufficient number of password sharers into long-term paid subscribers. Netflix said among shareholders A letter that early learning from testing in Latin America encourages the ability to convert password sharers into paid customers.
At a telephone conference on Tuesday, Netflix Chief Financial Officer Spencer Neumann said the company will spend about $ 17 billion on content in 2022 and will stay in its “zip code” for the next “several years.” rice field. This is a change from almost every year in the last decade that Netflix has increased content spending to build market share. Neumann acknowledged that spending on new programming will also ease as revenue growth slows.
“Our content costs will continue to grow, but we can adjust them as revenue grows to further ease them,” Neumann said.
It’s still unclear if Netflix can continue to grow its subscriber base without inflating its content budget. In particular, Netflix usually raises prices every year. Concerns are particularly high in the United States and Canada, where Netflix lost 1.3 million subscribers in the second quarter and marked the third quarter in the last five years when its customer base declined.
“Given the risk of higher churn rates with every price increase from here, the company will significantly re-accelerate growth in these regions,” said Michael Nathanson, an analyst at research firm Moffett Nathanson. Will be strongly pressed. “
In the coming years, investors will find that Netflix has begun its second growth activity, or The transition to value stocks is slow.
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