Netflix (NFLX), a darling stock during covid, has lost 70% of its value this year, and its earnings report will be coming out next week. The question for many investors and traders is if this is the right time to buy NFLX stock; this can be answered by looking at some critical factors in its earnings report.
2022 has been a tough year for Netflix, but the stock is off its lows of $165, formed on May 5 (the stock had reached a high of $700 in November 2021). Investors punished the stock even further when the streaming giant posted its first decline in subscriber numbers during last quarter's earnings. The company was projecting nearly 2.5 million new subscribers during the first quarter of this year, but the actual results confirmed that the streaming firm lost nearly 200,000 subscribers. Its outlook was further impacted when management indicated Netflix could lose roughly 2 million subscribers during the second quarter of 2022.
Netflix blamed many reasons behind its subscriber outlook, such as higher inflation, supply chain issues, eroding sending power, and sharing of passwords. The unattractive growth outlook pushed Netflix to do something that it had avoided for many years: introducing ads. Many in the market took that news as another adverse factor influencing its growth because Netflix came into the market to enhance user experience at a time when television and movie advertisements were pushing users away.
However, I believe that investors should take another look at Netflix's stock as most of the bad news may already have been priced in.
What To Watch During Earnings?
First thing first, it will be all about subscribers. Investors and analysts will focus their attention on subscribers number first, particularly if co-chief executive Reed Hastings provides any projections for the third quarter and beyond. Any indication that shows that the company can slow down the bleeding or even sign new users will be perceived as good news. It will also be worth watching to see how Netflix manages the password sharing issue and if it will take any steps to mitigate that issue.
Moving away from the subscriber numbers and growth, being cost-efficient is going to be another major focal point. In this industry, it costs a lot of money to be competitive, so it will be interesting to observe how Netflix manages the delicate balancing act between being financially prudent while still investing enough to produce content that attracts and retains users.
Is Optimism Warranted?
There is reason to be optimistic about the recent announcement of Netflix choosing Microsoft as its advertisement partner. This may prove to be a shrewd move on Netflix's part since it gives it access to readymade advertising solutions; if the marriage is successful, I wouldn't be surprised to hear chatter about Microsoft buying Netflix in the future.
Despite being largely outside of Netflix's control, supply chain problems and chip shortages are slowly diminishing, which should encourage a comeback in the production and sale of smart TVs, which might increase the number of subscribers.
In March, Netflix began rolling out a campaign to stop password sharing to its Latin American customers. Members will be able to add up to two non-household viewers as sub-accounts to their current profile by offering a discounted rate as an incentive. Additionally, the business unveiled a tool that enables customers to preserve their watching history, watch list, and tailored recommendations by transferring a current profile to a new one. All of these strategies could persuade benefit scroungers to open a premium account.
Price Action
There is no doubt that Netflix's stock is extremely oversold and presents a great opportunity for an investor who can stomach some risk. The risk-to-reward ratio is great as Netflix is a growth stock. Looking at the recent price action, the price has challenged its 50-day Simple Moving Average (SMA) a number of times now, and it is likely that we may see the price breaking above this average. If the price breaks above the 50-day SMA and stays above this average, a new bullish trend will emerge, which investors should not ignore.
To conclude, Netflix has chosen the right advertising partner, and most of the bad news may already be baked into its stock price. If there is no further adverse news or a new surprise like the last time, we could see buyers coming back.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Naeem Aslam
I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.
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