Netflix, after pulling out of a debilitating series of setbacks in the first part of 2022, will face another test on Thursday afternoon when it reports its fourth-quarter financial results.
As well as kicking off the quarterly earnings season for media and entertainment companies, the report will usher in a year of increased focus on the streaming business. Having moved mountains (and billions of dollars) to try and compete with Netflix after years of letting it run off the streaming game, media companies are still very early in their direct-to-consumer orientation process.
“Instead of being the new slice of bread, investors and executives have accepted that streaming is, in fact, not a good thing — at least not compared to what came before it,” MoffettNathanson analyst Robert Fishman wrote in a note to clients this week. “But that pre-streaming era is now long gone and will not return. If streaming is a mediocre business, so what? We are now in a streaming era.”
Netflix predicts it will add 4.5 million subscribers in the quarter, reaching 227.6 million subscribers worldwide. Even if it hits that target, its profit would be the smallest during the holiday quarter since 2014. The company added 8.3 million in the comparable period in 2021.
Programming milestones during the quarter, sure, including the rapid success Wednesday, have the potential to boost subscriber numbers. But earnings will fall significantly from a year ago, with analyst consensus calling for earnings of 44 cents per share, down from $1.33 in the quarter of 2021. Revenue has also come under pressure. standing, with the Wall Street consensus of $7.8 billion just slightly higher than $7.7 billion a year ago.
A key theme in the company’s previous earnings report last October was that Netflix executives believed they were “on track to re-accelerate growth” after two disastrous backward quarters earlier this year. Still, the cost of content continues to weigh heavily. Netflix has said it plans to keep content spending steady at $18 billion a year, though for a go-go tech player, flat is the new down.
Two key issues expected to feature prominently in the company’s shareholder letter and executive video interview (Netflix’s version of the traditional conference call) are password sharing and advertising. After years of ignoring or even winking at the practice of passing on credentials, the company has decided to stop letting subscribers do this for free. Co-CEO Ted Sarandos admitted during a December appearance at a conference hosted by UBS that the company can expect some complaints. “Consumers aren’t going to love it right away,” he said, “but we have to show them why they need to see value.” Many Wall Streeters see an inflow of several billion dollars in new revenue if the company can manage the process effectively.
Similarly, advertising is widely seen as contributing to revenue growth, even as the overall trajectory of subscription profits begins to level off. Early indications about the progress of the cheaper ad-supported subscription tier — which was introduced last November after a stunning reversal of the company’s longstanding anti-ad stance — is that traction is minimal. Financially, the mid-quarter launch in 12 territories was never expected to be a game-changer in the quarter, but many ears will listen closely to early descriptions of the effort.
Eric Sheridan, a veteran tech industry analyst at Goldman Sachs, described the start of Netflix’s $7-a-month subscription business as “muted” at best. In a note to clients, he questioned the magnitude of the positive side of the effort. “We expect a large number of large-scale brand advertisers to adopt the offering, but it is
current framework (large minimum stakes, above industry prices and limited measurement) could limit ad dollar opportunity (absence of wider range of users, greater measurement/attribution),” he wrote. “Additionally, we remain concerned that additional subscription offerings could lead to ‘spin-down’ to the lowest priced plans by users in a potential consumer recession over the next 6-12 months.”
Sheridan considers Netflix a “show-me stock” and rates stocks a “sell.” The opposite view is John Blackledge of Cowen & Co., who sees a “big advertising opportunity” as a catalyst for stocks. In a Cowen survey, Blackledge reported, one-third of digital ad buyers indicated they plan to buy space on Netflix.
Netflix still has long-term growth potential, says Blackledge, with incremental profit margins of 80% to 85%.
An investment company known for years as a Netflix bear, Wedbush Securities, has turned into a bull. In a report this week, the company’s Alicia Reese and Michael Pachter argue that the company is “well positioned in this murky environment as streamers change strategy, and should be valued as an immensely profitable, slow-growing company.”
Investors so far this year seem willing to tune in to the Netflix narrative. Shares of the company are up nearly 13% year to date in 2023, closing today at $326.33.