Netflix Earnings Focus on Initiatives and Bottom Line

All eyes are on the ad-supported subscriber experiment, and whether it ends up boosting the bottom line and warding off increasing competition.

Time for the Real Numbers

Netflix introduced two new initiatives this quarter that were highly anticipated and talked about for quite some time. Both are intended to shore up challenging subscriber and revenue numbers as the market becomes increasingly competitive. Recently, WB-Discovery announced the combination of its HBO Max and Discovery+ services under the brand name "Max", with both ad-supported and ad-free versions priced compete with Netflix new offers. Besides the launch of the ad-supported alternative, Netflix also started offering "paid sharing" this quarter in the hopes of garnering more revenue from sharing.

Q1 will see the first report of the real-world impact of these initiatives, in whether the company can capture more market share, or it will encourage people to switch from higher-cost subscriptions to the ad-supported ones. The ad-supported subscription was launched last November, and it was reported in late March that it had topped a million users in the US, which was slower growth than expected.

The Bottom Line Matters Most

The consensus among analysts is that revenue will increase 3.9% compared to the prior year, but profitability will go substantially in the other direction. Earnings are expected to fall 20.45 to $2.81. Signs of this trend are that Netflix is already trying to improve the bottom line by initiating cost-cutting measures, such as reducing spending on movie production and cutting "a few jobs"
according to press reports.

Since Netflix isn't providing guidance for subscriber numbers any more, the figure in the current report could provide more of a jolt to the stock price. Investors are also going to be interested in
whether the company provides a break-down of subscriber numbers by ad-supported or not, and how much revenue comes from ads. In the interest of gauging how much the company could return to shareholders in a cost-cutting environment, free cash flow is also likely to be in focus.

Netflix

The share price of netflix has been on an upward trend, trading within a channel. The most recent move down to $285 failed to tap the lower trendline, offergin a chance for bullish price action to $350. If the local resistance breaks, the stock might rise to $380 and perhaps $400. Conversely, losing $315 will expose the stock to the local swing, unless momentum is strong and we receive a break outside the channel and towards $250.

Key Takeaways

Netflix introduced two new initiatives in their first quarter that are designed to address the challenge of increasing competition. The impact of these initiatives on market share and profitability will be seen in the Q1 report. While revenue is expected to increase, earnings are predicted to fall due to cost-cutting measures such as reducing movie production and cutting jobs. Investors are looking for a breakdown of subscriber numbers and revenue from ads, as well as free cash flow.