Once a Wall Street darling, with a stock price that soared 6,230% in the 10-year period ending in November 2021, netflix (NASDAQ:NFLX) has since crashed back to Earth. The company has long prioritized membership growth over cash generation, but with a loss of 200,000 subscribers in the first quarter of this year, investors are questioning the company’s outlook. Shares are down 71% so far in 2022.
The first streaming service reports second-quarter financial results on Tuesday, July 19, and there’s one critical metric I’ll be keeping my eyes on: the addition (or loss) of subscribers.
Show me customer growth
Not only did Netflix lose members in the first quarter, but in the quarter just ended, management expects to lose another 2 million. Intense competition from direct rivals like waltz disneyfrom Disney+ and Hulu, Amazon First video, and Discovery of Warner Bros.HBO Max was cited by the management team as a major factor negatively impacting performance.
For a company that has grown from just 21.6 million paying subscribers at the end of 2011 to 221.8 million at the end of 2021, the disappointing numbers recently came as a shock to shareholders who have grown accustomed to rapid growth. For what it’s worth, management expects sales to grow 9.7% year-over-year in the second quarter.
Investors will not only want to see the company lose less than the 2 million subscribers projected by management, but perhaps even post net additions. This situation would certainly be a good surprise, with the potential to drive stocks higher after the announcement of the results. Kannan Venkateshwar, research analyst at Barclaysthinks Netflix will lose 2.8 million members in the quarter, a number that would surely crush the stock.
Netflix, like most other companies, unfortunately faces a difficult macroeconomic environment. Persistent inflation It’s at a 40-year high has prompted the Federal Reserve to aggressively raise interest rates, and many fear a recession is on the way in the near future. In fact, Netflix has laid off staff twice this year, preparing for an economic downturn.
It’s not all bad news, however. According to data from Nielsen, Netflix still accounts for the most time spent on a streaming service per day in the US, and streaming globally accounts for just 31.9% of total time spent on TV. This puts things into perspective and shows that there are still plenty of opportunities for Netflix to drive higher levels of engagement.
Along with making inroads into the gaming space, it’s now well known that Netflix plans to introduce a cheaper, ad-supported levelrecently announced that the company would partner with tech giant Microsoft. Not only should this strengthen the company’s ability to attract new members, especially those who are more price-sensitive, but it will further support revenue growth, something needed for Netflix to continue investing tens of billions. every year in new content.
And the company is still a leader in creating top-notch content, like the smash hit stranger things, whose final season racked up 1.3 billion hours of viewing in the first 28 days of release, easily making it the most popular English-language series in Netflix history. Splitting the new season into two parts was a smart move by management to prevent customers from just gorging and canceling their subscriptions.
Despite some headwinds, Netflix is still the biggest player in the streaming wars right now. But next week’s highly anticipated financial report will be one of the most-watched releases this earnings season. For struggling stocks, nothing matters more than the number of followers.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Neil Patel has positions at Amazon and Microsoft. The Motley Fool holds positions and recommends Amazon, Microsoft, Netflix and Walt Disney. The Motley Fool recommends Barclays and Warner Bros. Discovery, Inc. and recommends the following options: Long Calls January 2024 at $145 on Walt Disney and Short Calls January 2024 at $155 on Walt Disney. The Motley Fool has a disclosure policy.
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