ii view: Netflix shares rally after 2022 horror show

Plans for a new service were announced in tandem with these second-quarter results. We assess prospects. 

Second-quarter results to 30 June

• Lost nearly 1 million subscribers to a total of 220.67 million
• Revenue up 8.6% year-over-year to $7.97 billion
• Earnings per share up 8% to $3.20

Guidance:

• Expects to add new subscribers of 1 million during the third quarter

ii round-up:

Global streaming media giant Netflix (NASDAQ:NFLX) reported better-than-expected quarterly subscriber numbers following its first quarterly loss in customers in over a decade during the previous quarter. 

Second-quarter subscriber losses come in at just under one million compared to management’s prior forecast for a loss of two million. It also announced plans to introduce a cheaper service which plays adverts in early 2023 to accompany its push for a crackdown on password sharing.

Netflix shares rallied by more than 6% in after-hours US trading having fallen by around two-thirds year-to-date. Shares for rival streamers Walt Disney (NYSE:DIS) and Prime owner Amazon (NASDAQ:AMZN) are down by 36% and 29% so far during 2022. The Nasdaq composite index is down by a quarter. 

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Netflix forecast a subscriber gain of one million during the current third quarter to the end of September, below Wall Street estimates of around 1.8 million and down from 2021’s third quarter gain of 4.38 million new customers. 

Earnings per share for the Californian headquartered company rose 8% to $3.20, beating analyst forecasts nearer to $3 per share. 

Broker Morgan Stanley retained its ‘equal-weight’ rating on the shares following the results, summarising Netflix’s plans as accelerating its revenue growth while moderating its content investment growth. 

Revenue of $7.97 billion during the period, although up 8.6% year-over-year, marginally missed Wall Street hopes nearer to just over $8 billion. Paid memberships for its core US and Canadian business fell by 1.3 million, making for three quarterly losses during the last five quarters. 

ii view:

Started in 1997, Netflix today employs over 10,000 people. A producer of content, its popular programmes have included Squid Game, Stranger Things, Bridgerton and The Witcher.  More than 90% of its net new subscribers over 2021 came from outside its home North American region. Total paid net new subscribers during the full year 2021 of 18 million compared to 37 million during the heavy pandemic lockdown year of 2020.   

For investors, elevated inflation and a global cost-of-living crisis are likely to leave many households looking for savings, with cuts to non-essential entertainment services such as Netflix a possible candidate. Competition from the likes of Walt Disney remains high, while unlike rivals Comcast Corp (NASDAQ:CMCSA), which owns Sky TV, and Apple (NASDAQ:AAPL), Netflix pays no dividend. 

On the upside, potential for growth in streaming TV at the expense of more traditional linear TV remains. New lower cost advertising included service should also help cost pushed consumers, while Netflix bought video games maker Night School Studios during 2021 and has begun testing an online game offering in selected countries.

In all, metrics for Netflix are likely to remain volatile. Content success remains key, and Netflix has a strong track record of generating strong content. The trend from linear TV to streaming services is ongoing but is certainly not what it was during the pandemic. Netflix must up its game, and the case for buying remains dependent on its ability to deliver better content than the competition and convince punters to pay for it. One to watch closely in the coming quarters. 

Positives: 

• Streaming TV services overall still growing
• Potential to add sport content

Negatives:

• Intense competition from Disney, Apple and others
• Subject to currency movements given growing overseas customer base

The average rating of stock market analysts:

Hold