Netflix shares face several challenges

A new ad-based subscription program is likely to be the focus with the streaming firm expected to report a third consecutive quarter of lower earnings this week.
----------------

IT's getting crowded here

As Americans witness their salaries buy less, "luxury" items are likely to be the first items to be cut from the budget. This would make a challenging environment for Netflix, but the proliferation of other similar services from more prominent, established studios has also hurt subscription numbers. The standard Netflix subscription is now the most expensive in the key US domestic market.

The half-priced service financed with ads could help boost subscription numbers, but it's still an open question about how much advertising revenue it can generate. Typically, ad spending diminishes in challenging economic environments. On the other hand, it might allow Netflix to gain market share, and ad-based subscribers could move to the full subscription service once the risk of a recession is over. Traders are likely to focus on guidance for subscription numbers, as it was already speculated that Netflix will see 40M unique viewers by the third quarter.

Getting people to pay

Previously, Netflix tried to reduce the amount of "account sharing", but that hasn't stopped the company from losing almost a million subscribers since the start of the year. Last quarter, it had targeted adding back a million subscribers.

With an increasing share of viewers overseas, the strong dollar is starting to become an issue for earnings growth too. Currency headwinds could lead to a cut in free cash flow guidance, which was last projected at $1 billion for the current year.

Netflix is expected to report earnings of $2.14, down from $3.20 last quarter. Revenue is also expected to fall to $7.8B on a sequential basis but rise on year-over-year comparables.

NETFLIX

The Netflix share price is stuck in a range between $215 and $252, with a breakout in either direction possible. The longer-term trend remains biased up above the swing low of $204, increasing the chances of an upward market.

Breaking past the top opens the door to $289, being the measured moved of the current range. If the sideways bottom is lost, the first target lies below $204 at the round support of $200.

Under there, $180 comes back on the bear's radar. But if $230 holds firm, it could lead to a breakout or an extended consolidation.

Key takeaways

Netflix is struggling because people are cutting back on spending, and their subscription is now the most expensive.

The firm is considering offering a half-priced subscription service that ads would finance. It's unclear how much advertising revenue this would generate, but it could help gain market share.

Netflix is also facing issues with account sharing, which has led to a loss of almost a million subscribers. The company also suffers losses due to the strong dollar, negatively impacting earnings growth. As a result, it might have to cut its free cash flow guidance for the year.