Netflix co-founder and CEO Reed Hastings attends a red carpet for Netflix launch at Palazzo Del Ghiaccio on October 22, 2015 in Milan, Italy.
Jacopo Raule | Getty Images
Netflix’s second quarter results can be interpreted in two very different ways. The future of the business depends on which reading turns out to be correct.
The world’s largest streaming company announced on Tuesday that it lost nearly one million subscribers in the three-month period from April to June, marking the second straight quarter in which it lost customers. Still, that was less than the $2 million loss the company had expected, and Netflix shares rose about 6% to $214 in midday trading Wednesday.
The second quarter results offer a new bullish case for Netflix investors. If the quarter serves as a “bottom” — the point at which Netflix stopped losing subscribers and started growing again, albeit at a snail’s pace — investors have a new growth story. In the next quarter, Netflix planned to add 1 million subscribers. This may be the main reason stocks rose on Wednesday.
“With emerging signs of the subscriber base stabilizing, we believe the prospect of a prolonged period of subscriber losses is becoming increasingly unlikely,” said Stifel analyst Scott Devitt. in a note to customers. Stifel on Wednesday raised its rating on Netflix shares to “buy.”
But the results, which some investors found quite good, may only lead to temporary relief. The bear case for Netflix is that Wednesday’s rise in stock value is a “dead cat bounce” – Wall Street jargon for a temporary rally after a substantial drop. Netflix faces increasing competition from major players entering the streaming market, including Disney’s Disney+, NBCUniversal’s Peacock and HBO Max. This has raised questions about whether Netflix will be able to maintain its dominance, especially in the lucrative US market.
The new growth case
Previously, Netflix bulls poked fun at the idea that the company would turn its massive global scale of 221 million subscribers into positive free cash flow by raising prices and reducing churn. This transformation from a loss-making company into a free cash flow machine would enrich shareholders.
It has now happened, or at least it is about to happen. Netflix said in its letter to shareholders that it will generate $1 billion in free cash flow for 2022. In 2023, Netflix said there will be “substantial growth” in free cash flow.
And yet, Netflix shares are still trading 70% below all-time highs set in November.
A second wave of subscriber growth could be the company’s new narrative for investors. There’s reason to believe that Netflix subscribers will once again get ahead. Netflix has announced that it will crack down on password sharing and launch a cheaper tier of advertising in 2023. Both of these initiatives could lead to more signups.
End of its heyday
If Netflix’s subscriber growth doesn’t pick up, the second quarter of 2022 will serve as an inflection point when it becomes clear that the company’s heyday was over.
“Where do its under-losses end, given stiff competition from newer, cheaper and richer streaming services?” wrote Needham analyst Laura Martin. “222 million subscribers worldwide could turn out to be Netflix’s peak subscriber count.”
This may turn out to be the case if Netflix cannot turn enough of its password sharers into long-term paying subscribers. Netflix told its shareholder letter that he is encouraged by his early learnings from testing in Latin America that he can convert password sharers into paying customers.
During Tuesday’s conference call, Netflix CFO Spencer Neumann said the company plans to spend around $17 billion on content in 2022 and will stay in that “zip code” for the “next few years.” “. That’s a change from nearly every year over the past decade, when Netflix increased its spending on content to grow market share. As its revenue growth has slowed, Neumann acknowledged that spending on new programming will also moderate.
“Our content spend will continue to grow, but is more subdued as we’ve adjusted to our revenue growth,” Neumann said.
It remains to be seen whether Netflix can continue to grow its subscriber base without an ever-growing content budget, especially since the company typically raises prices every year. Concern is particularly high in the United States and Canada, where Netflix lost 1.3 million subscribers in the second quarter, marking the third quarter of the past five when its customer base dwindled.
“Given the elevated risk of churn with every price hike from here, the realistic concern is that the company will struggle to materially re-accelerate growth in these regions,” said Michael Nathanson, an analyst at the firm. research MoffettNathanson.
In years to come, investors may look to the second quarter of this year as when Netflix began its second act of growth or its slow migration into a value stock.
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