Netflix Inc (NASDAQ:NFLX) is at a critical juncture in the leadup to its third-quarter earnings call on Tuesday October 18.
With an ever-expanding set of competitors, ropey subscription numbers and little on the way of AAA programmes since Stranger Things’ season four finale, the streaming giant is in need of some good news.
But in the days leading up to the earnings report it was revealed that almost 1mln UK households cancelled streaming services have so far this year amid the cost of living crisis, with Netflix accounting for almost a quarter of all households that changed or scrapped their streaming service in the third quarter.
Stranger Things is Netflix’s most prized IP, but is their wider catalogue good enough? – Source: Shutterstock
The company’s own outlook could be considered realistic, if not pessimistic, which is unsurprising given that Netflix suffered its first net subscriber losses in over a decade earlier this year.
Chief executive officer Reed Hastings expects 5% year-on-year (YoY) sales growth, hampered by a strong dollar- most of Netflix’s revenues come from outside of the US.
Operating profit is expected to hit US$1.3bn on a 16% margin, indicating a 29% YoY drop.
The company expects to recoup the one million subscribers who have fled the platform in 2022, and achieving that target could actually be a more critical number than the underlyings.
Analysts at UBS actually expect Netflix to add 1.5mln subs in the third quarter, 50% more than the company’s own guidance, certainly a bullish position. As such, UBS has increased its 12-month price target from US$198 to US$250.
According to analysts at AJ Bell, full-year earnings per share (EPS) is expected to come in down in 2022, at US$10.01 against $10.74 in 2021, although a modest return to growth is pegged for 2023, when EPS is expected to reach US$10.99.
“It is apparent that the streaming pandemic party is well and truly over,” Paolo Pescatore, a tech, media and telecoms analyst at PP Foresight.
Pescatore continued: “During this time, we saw a rapid increase in consumer adoption fuelling subscription revenue. Conversely, during a recessionary period, users will be forced to make some tough decisions regarding the need to keep on paying or signing up to a slew of services.”
Advertising tier comes with a caveat
As part of Netflix’s attempt to shore up interest, the company announced a new advertising-backed subscription tier due to be released in November.
We now know that the price will be £4.99 in the UK and US$6.99 in the US.
“Pricing details of its new advertising-backed subscription package went down well with the market, sending its share price up 5%,” said Russ Mould, investment director at AJ Bell.
He added: “It is hoped that a cheaper offering will reignite subscriber growth and stop customers from leaving during the cost-of-living crisis.”
But the advertising tier is also a gamble for Netflix- should the economy rebound and disposable incomes go up, Netflix could find its per-user profit margin lower than it could be.
“It’s easy to get hooked on a diet of discounts and customers might not find the advertisements before a show or film too distracting, so there is a risk that they stay on the lowest subscription package permanently,” observed Mould.
“The move to offer an ad service of some kind was not part of the company’s script,” reckons Pescatore, but: “Make no mistake, this is a significant move that takes Netflix in direct competition with free-to-air broadcasters around the world.
“This will attract interest from entertainment shows like Strictly, the Masked signer et al to all consider making moves towards distribution via the streamers.”
All in all, Tuesday will be a make-or-break moment for the streaming giant.