Netflix Earnings Analysis: Why Wall Street Has Low Expectations

The first few months of 2022 have not been good for Netflix shares, which are down 44% day by day. At the end of last week, they were at $341.13, down from $612.09 at the end of 2021. And few on Wall Street expect the streaming giant’s first-quarter earnings and subscribers on Tuesday to reverse. the current gloomy mood status of investors.

“Netflix’s April 19 earnings are a hot topic in our conversations with investors, stocks remain controversial and sentiment is negative,” said Doug Anmuth, analyst at JP Morgan.

Finally, weaker-than-expected fourth-quarter earnings in the face of what management calls “increasing competition” and a disappointing first-quarter growth rate of $2.5 million from $4 million in the same quarter. period of 2021, caused huge losses. Hit where the bag wasn’t retrieved. The recent Streamer subscription price hike was widely perceived as an emphasis on the company’s need to seek revenue from sources other than customer additions.

Analysts also noted that Wall Street has focused on raising costs for original content amid intense competition in the streaming space. In that context, it looks like Netflix needs to pull the rabbit out of its hat as part of its latest earnings report to significantly change the mood. However, management is more likely to continue to highlight the issue of flow growth, which is also highlighted in a fourth quarter investor letter that said the 10% has great room for growth if we can continue to improve our service.

As for the first quarter of subscribers, Netflix’s decision to suspend the service in Russia, where JP Morgan’s Anmuth estimates the company had between 1 million and 2 million users, due to the country’s invasion of Ukraine, will be reversed further. Based on discussions with investors, Anmut said, “We think first quarter net additions are expected to be 3.0 million more for Russia (our estimate of 2.7 million), or about 1.0 million more for Russia. 2.0 million for after Russia”.

Cowen’s John Blacklage, who has an “overweight” rating and a $605 price target on Netflix, said in an April 12 report that he was “slipping Q1 subscribers down a bit after the conflict.” in Ukraine”. In the report itself, it said: “We now expect a net increase of 1.45 million paid, which is below the 2.5 million mark due to the suspension of Russia (approximately 1 million subscribers).

“Our US research suggests that Netflix still retains an edge over living room TV, even though TikTok is gaining a share of mobile video viewing,” Blacklace wrote of US trends. may slightly increase the lag in the short term.” Overall, the Cowen expert “slightly lowered our forecast below”, as a result, he lowered his share price from $10 to $590. However, he maintained the “best” rating.

BMO Capital Markets analyst Daniel Salmon also updated his forecast of suspension of services in Russia and “robust data dumps in Southeast Asia and India”. Overall, the forecast for its net additions drops from 2.48 million to 1.76 million, “reflecting about 1 million fewer Russian members…partially offset by the largest net increase in Asia Pacific.” He added: “Our target is dropping to $640 from $650, which is due to lower estimates, mainly due to the removal of the Russian model.”

But Salmon maintained his rating for the “best” campaign, summarizing: “Subscriber growth continues to be significant, but the market is gaining more control over the path to profitability for the last streaming subscribers and is now on an uptrend for streaming streams.” positive box. for Netflix. “We remain above consensus on free cash flow as we see continued optimization of content spend, contributing to revenue growth and alleviating overhead.”

Like his peers, Netflix-rated Benchmark analyst Matthew Harrigan also sees little room for a positive surprise among subscribers. “We don’t see much of an effect on the seasonally weak Q1 guidance for the growth of 2.5 million global members as of the end of the quarter. bridgeton second season and earlier ana’s invention“, – writes in the March 30 report. “This is because management reduces the effects of any original release. The fourth quarter of 2021 is the Korean language dystopia. squid game It was the first hour of airtime ever, with $1.65 billion in its first 28 days. red warning The most watched movie was 364 million hours. Fourth quarter global membership growth still went unnoticed at 8.3 million despite these two launches.

However, Wells Fargo’s Stephen Kohl, who has an “overweight” rating and a $600 price target on Netflix, raised his first-quarter subscriber forecast on Sunday. “We are accruing net revenue for the first quarter of 2.5 million to 2.9 million based on correlation analysis of our monthly active customers (MAU) and the impact of deactivating 1-2 million Russian subscribers,” he wrote. Kahal.[T]It is in anticipation and viewing rooms that investors are likely to move later and little will be disclosed. In fact, we think many investors want to see how liquid supplements fare in the first half as a stronger driver of Netflix’s thesis and assessment.

Meanwhile, Wedbush Securities analyst Michael Puchter, who is “neutral” with a price target of $342 per share, expects to add a global consumer of $2.5 million, according to the guidelines, as any progress is likely to be absorbed by Russian consumers. . A bedroom. ” Created 400,000 net additions to US and Canada, “Revenues in the region increased with price increases recorded in the quarter; 750,000 net surplus in Europe/Middle East/Africa, quarterly price increases likely offset by currency headwinds; And 300,000 net additions in Latin America, due to currency resistance due to low income per customer. It also plans to add 1.05 million subscribers in Asia “at a partially reduced price in India, which may have led to a quarterly increase in customers”.

Meanwhile, Guggenheim analyst Michael Morris predicts that more than 3 million global net worth members will grow in the quarter, writing in an April 11 report: “Our outlook is supported by third-party Apptopia download data. The company added 4.4 million global members and the data was in line with reported performance. We have adjusted the geographic composition of our outlook to reflect conflict-related headwinds in Europe, which are offset by the strength of landings in Latin America and Asia-Pacific markets.

Morris noted that its “relatively high membership forecast compared to guidelines also reflects our confidence in Netflix’s weighted content list for the last quarter (the adam project, bridgeton The second season! bad veganTo be continued ana’s invention “Viewer) is gradually supporting the addition of stronger full-time members and a reduction in quarterly departures.”

Evercore ISI analysts, led by Mark Mahein, also noted in their March 16 report some positive and negative results from a survey of 1,500 American respondents. 69% of respondents used Netflix, up 2% from the previous quarter, followed by Amazon (66%), Hulu (54%), Disney (53%) and HBO (40%), and the big gets bigger . “All major streamers gained shares this quarter,” they wrote. However, Mahan’s overall approach was optimistic. “If content is king, Netflix takes the crown,” he wrote. The analyst maintained its “relevant” rating on Netflix’s $525 price target.

Wall Street will also focus on commentary on Netflix’s three test markets on how to make money sharing a password outside a subscriber’s family. Many believe this will create an opportunity for the non-subscription streaming giant, but several analysts questioned whether it could be of great benefit to them.

“I doubt the attack will lead to a 5 percent increase in subscriber numbers, partially or fully offset by a decline in growth, and it won’t have much or no financial impact,” Michael Puchter, an analyst at Wedcush, said recently. hollywood reporter. “I think they are doing it now because the growth has stopped.

And Cowen’s Blackledge wrote in a recent report, “Our analysis suggests that global distribution could increase our 23-year revenue estimate by about 4 percent.”

Harrigan even said he was “skeptical that ‘adding an extra member’ would increase the game, especially as it could be cannibalizing full-time member growth.” In a March 17 report, he shared this math: “A reasonable high-income benefit might be members in attendance sharing passwords (about 30%) x additional income (about 25%) x percentage of families getting a new plan ( 50). Percent?). “That equates to an additional 4% income before cannibalization, because you haven’t made one or two outsiders as separate members.” Harrigan’s proposal: “This is an estimated moderate benefit for a lost sharing economy.”

Meanwhile, Leichtman Research Group found that “33% of Netflix services are used by more than one household” in the United States. Netflix services are used by one family but are borrowed from another family who pays for the service, and the 3% is used by many families who share the costs.

“Sharing helps expand the customer base and retain them, but it also creates a gap between the number of households who have the service and the subscribers who actually pay,” said Bruce Leichtman, president and chief analyst at Leichtman Research Group. . For example, about two-thirds of American households say they own Netflix, but that includes about 10% of American households that don’t pay for the service because they borrow it from the network.