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Earnings Outlook: After its own Oscars slap and Wall Street smackdown, Netflix searches for a rebound

Netflix Inc.’s 2022 started with a thud, and then the streaming pioneer suffered a “slap” of its own on Oscar night.

Netflix
NFLX,
-1.12%

now braces for another test of its diminished market standing.

On Tuesday, April 19, the company will report fiscal-first quarter earnings, after its forecast sent shares into a spiral in January. The stock plummeted 22% after its last earnings report, lopping off $49.1 billion in market capitalization and making it the worst quarter for the stock in nearly a decade.

A bigger loss may have occurred March 27, when Netflix’s candidate for best picture, “The Power of the Dog,” lost to Apple Inc.’s
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+1.15%

“Coda,” allowing upstart Apple TV+ — which entered the streaming-service industry a decade after Netflix — to be the first streaming service to nab a best-picture win.

Netflix’s loss, on a night when Will Smith infamously smacked Chris Rock with a roundhouse slap, was a creative blow for an operation that spent about $17 billion on content in 2021 and is expected to spend another $19 billion in 2022, according to Wall Street research firm MoffettNathanson. Netflix appears to be reining in that spending — executives have twice warned employees in recent weeks to be mindful of spending and hiring, according to a report in The Information.

Read more: A tortoise-and-hare story: How Apple beat Netflix to a best-picture Oscar despite its later streaming start

Netflix could make moves to diversify and find some new growth, like its foray into videogames last year. Needham analyst Laura Martin is adamant Netflix adopt an ad-supported service to carry news and sports, as its competitors have. In the process, Netflix would add 27% to 67% to total revenue with such an approach, she said.

“Amazon and Apple are buying exclusive sports rights, implying live sports are the next competitive battlefield,” Martin wrote in a note March 16 that rates Netflix stock as underperform. “NFLX will lose to Discovery+/HBO Max/Warner, Paramount+, Comcast/Peacock, Apple+ or others, we believe, unless it adds live sports and news to its content line up, and returns to U.S. subscriber growth by adding an ad-lite SVOD tier like EVERY other streaming competitor.”

Meanwhile, with price hikes rolling out to subscribers, some members could drop Netflix for its growing cohort of competitors. New net subscriber additions are expected to wane — analysts on average predict 2.81 million in the first quarter, and 2.64 million in the second quarter, according to FactSet. That would lead to a first-half total of 5.45 million new subscribers, slightly down from 5.52 million in the first half last year.

Netflix is trying to change the conversation, though, looking to highlight subscriber retention and the potential to continue growing over the long term. Netflix continues to command viewer loyalty worldwide — 70% of its desktop visitors watched it exclusively — despite a crowded competitive landscape that includes Apple, Walt Disney Co. 
DIS,
+0.15%
,
 Amazon.com Inc. 
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 and its new additions from the MGM acquisition, AT&T Inc.
T,
-0.36%
,
Comcast Corp.
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-0.76%
,
 Paramount Global
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+0.81%

 and others, based on figures from data intelligence platform Similarweb in December 2021. Similarweb noted that fewer consumers are canceling Netflix, based on a decline in cancellation rate.

By the end of 2025, J.P. Morgan analyst Doug Anmuth predicts Netflix can “reach [more than] 300 million global subscribers based on 31% penetration of the 953 million global broadband subscribers, 42% penetration of the 720 million global Pay TV subscribers, & 38% penetration of the 778 million maximum global Pay TV subscribers.” In his March 30 note, Anmuth rated the company’s stock overweight with a $605 price target.

What to expect

Earnings: Analysts surveyed by FactSet expect, on average, Netflix to report first-quarter earnings of $2.95 a share, down from $1.57 a share a year ago.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of $2.95 a share on average.

Revenue: Analysts on average expect Netflix to report $7.94 billion in first-quarter revenue, up from $5.77 billion a year ago. Estimize contributors predict $7.98 billion on average.

Stock movement: As of morning trading Tuesday, Netflix’s stock has nosedived 41% so far this year — among the worst Nasdaq 100
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performers — while the S&P 500 index
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 has declined 6%. Shares of Netflix are down 34% since the company last announced quarterly results.

What analysts are saying

Analysts like Cowen’s John Blackledge are concerned about Netflix’s slackening subscription growth. In reducing his price target on Netflix shares to $590 from $600, Blackledge forecast paid net adds of 1.45 million, well below FactSet’s estimate of 2.81 million, owing much to the suspension of 1 million subscriptions in Russia because of its invasion of Ukraine. 

Citing uncertain macroeconomic conditions, Stifel analyst Scott Devitt last week lowered his price target to $460 from $500 while maintaining a buy rating.

“Looking past 1Q, we are tempering our estimates for 2022 and beyond as we take a more conservative approach to subscriber and ARPPU [average revenue per paying user] growth given worsening macro conditions and continued uncertainty around when/if acquisition growth will return to pre-pandemic levels,” Devitt said in an April 6 note.

It isn’t all bad news of late for Netflix. “If Content is King, Netflix Wears the Crown,” Evercore ISI analyst Mark Mahaney wrote in a March 16 note that rates Netflix shares as in line with a price target of $525.

“This is why we believe Netflix remains a Top choice in any household’s Streaming Bundle. Among the power Streamers that watch Netflix, Disney+ AND Amazon Prime Video, Netflix continues to lead in content quality, with increasing ratings for the 4th quarter in a row, while Disney+ has declined for the 4th quarter in a row,” he wrote.

Mahaney came to this conclusion based on results of a recent survey of 1,500 people in the U.S. In it, 69% of respondents said they used Netflix, up 2% from the previous quarter, followed by Amazon (66%), Hulu (54%), Disney (53%) and HBO (40%).

Still, there are worrisome signs. More than half (52%) said they were “extremely/very satisfied” with Netflix, down from 61% the previous quarter — the largest sequential decline in years — because of increased competition and negative reaction to a recent price increase.

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