Netflix Earnings Preview

The first major tech stock of the season to report has some analysts worried that subscriber numbers won't match past growth after the price hike.

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Stay-at-home is over

The Netflix stock price has been falling so far this year. That's not entirely surprising as the company got a boost during the pandemic, but the extent of the decline this year has been quite shocking. People are spending less time at home, and investors are looking to shore up their portfolios as interest rates are expected to rise.

The other problem is that Netflix is more vulnerable to inflation than other consumer goods, even if they don't raise prices again. Streaming services are considered a luxury, and one of the first to get cut when consumers need to stretch their funds a little further to cover the basics.

Water under the bridge?

Of course, once a stock falls the valuation changes, meaning that there is a chance for recalibration. The last time Netflix reported, it provided disappointing guidance for new subscriber numbers, expecting only 2.5M adds. That compares to 4M a year prior. But on the bottom line, earnings still beat estimates last time. So, is it possible that Netflix has already given the worst of the bad news (price hikes, slow subscriber growth, and increased competition) and is now ready to roar ahead?

Netflix decided to suspend operations in Russia, where it is estimated to have about a million users. That could negatively impact the net subscriber ads this quarter. But, the market has likely already priced that in.

Where to look

The two main areas of focus for investors are likely to be content production spend and subscriber guidance. The consensus is for Revenue to have increased to $7.9B from $7.7B in the last quarter. But the factor of spending more on generating content is seen as the major obstacle to any reciprocal rise in the bottom line.

EPS is forecast at $2.92, which although a substantial increase over the $1.33 last quarter, that's likely due to seasonal effects and isn't showing an improvement over the prior year.

NFLX stock price at risk

NFLX is down ~50% in 2022 alone, plummeting from above $600 per share on Dec 31st to $330 -- both in March and April. An uptrend line connecting the late 2018 and 2020 lows is continuing the downtrend for now.

Netflix is clearly in a bear market and looks set to test the March 2020 low. A break there might even take the stock closer to the $250 support of Sep ’19. A strong rally over the recent peak near $400 would be needed to give bulls any confirmation that the bottom is in.

Source: Spreadex trading platform

Key takeaways

The reaction of investors has been to reduce exposure to Netflix as people spend less time at home and interest rates increase. Although projections may allow investors to think that the worst has passed, the impact from Russia should be watched very closely.

Analysts expect increased content production spending to lead to higher earnings, but this is unlikely to be an improvement compared to last year. And last time Netflix reported, it beat estimates, but investors were more interested in subscriber growth, which is seen as most critical to the company’s growth.