Shares of Netflix (NFLX) have underperformed the market significantly in 2022, falling 48% and 66% in the respective three and six months. The stock has also dropped 72% and 53% over the past nine months and 12 months, respectively. Is now a buying opportunity?
The streaming pioneer is set to report second quarter fiscal 2022 earnings results after the closing bell Tuesday. While the word "pioneer" is still applicable, Netflix is not alone anymore. The likes of Disney (DIS), with Disney+ and Hulu, among other streaming providers, are catching up. This has prompted the market to question whether NFLX can maintain its status as the king of streaming. This is one of many burning questions for Netflix management heading into the upcoming earnings report.
Aside from the recent loss of subscribers, investors will want to know if Netflix will ever grow again. Price increases in the U.S. and Canada and parts of Europe have contributed to the sub losses. The company has forecasted revenue growth of 10% for the just-ended quarter, which is about 50% below prior estimates. Netflix was once growing new subscribers at rate of about at the 25 million per year. Those days are seemingly long gone. And Q2 estimate for global paid net new subscribers are likely to miss Street forecasts.
Nevertheless, with more than 221 million global paid subscribers, Netflix is by far the industry leader, ahead of the aforementioned Disney. Plus, the company is now looking to pivot and diversify its revenue stream by partnering with Microsoft (MSFT) to implement an ad-supported tier of its service. The company is also hammering down on account sharing, hoping to recoup potential lost revenue. However, it’s not clear how soon these initiatives can bear fruit. That question will be answered when Netflix issues its guidance forecast for the next quarter and full year.
For the quarter that ended June, Wall Street expects Netflix to earn $2.96 per share on revenue of $8.05 billion. This compares to the year-ago quarter when earnings were $2.97 per share on $7.34 billion in revenue. For the full year, ending in December, Netflix’s earnings are projected to decline 3.5% year over year to $10.84 per share, while full-year revenue of $32.32 billion would mark an increase of 8.8% year over year.
The streaming market size is forecasted to grow by better than 18% annually (compound) in the next four years. With a total addressable streaming market of 750 million, Netflix’s 222 million subs means it has only penetrated 30% of the market. In other words, the company still has 70% of the market to capture. When combined with the lowest churn in the industry, Netflix has a notable advantage. The company’s slate of original content has been a key to its subscriber growth.
In 2021 the company spent roughly $17 billion into content, and with the recent success of the streaming hits such as the new Stranger Things, it’s possible that Netflix’s struggles are coming to an end and the company will regain its the market share it has lost. But Netflix needs to revive its subscriber growth metrics. In the first quarter, the company beat profit expectations with adjusted earnings of $3.53 per share, on revenue $7.87 billion, up 10% from a year ago.
However, Netflix said it lost 200,000 subscribers on a net basis, missing its own guidance for additions of 2.5 million subscribers. It was the company's first subscriber loss in a decade. Investors were understandably disappointed by these results, which explains the degree of punishment the stock has seen year to date. Netflix management has shown it can pivot to make the necessary adjustments to remain competitive. But on Tuesday the market wants to see if Netflix can reaccelerate its revenue growth and subscribers.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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