For Netflix (NASDAQ:NFLX), the importance of its upcoming earnings reports has been a consistent theme in recent years. While this can be said for any company, Netflix’s unique trajectory sets it apart. After defying expectations for an extended period, the company eventually faced a reality check, and each quarter became a question of whether it would be the one to disappoint. However, during the COVID-19 pandemic, with people staying at home and streaming more content, Netflix’s numbers continued to soar. At that time, competitors like Disney (NYSE:DIS), Apple (NASDAQ:AAPL), and WBD (NYSE:WBD) were not as solid in the streaming space, positioning Netflix as the clear leader.
While Netflix stock eventually hit a bump, its subsequent recovery has been steady, leading many to expect a positive earnings report. However, for streaming stocks, it is essential to be cautious and remember the reasons why the sector has come with a “buyer beware” warning.
Netflix made a turnaround by reversing some of its previous stances, such as introducing an ad tier and cutting spending, both of which showed promise. Despite the challenging decisions and conversations these changes entailed, Netflix managed them well. The company also announced plans to crack down on password sharing, which received mixed reactions. While some anticipated a mass exodus, the actual impact was different. Netflix experienced a substantial increase in new subscriptions, with average daily signups rising by 102% in the days following the password crackdown, surpassing the growth observed during the early days of the pandemic.
However, it is crucial to note that along with the growth in new subscriptions, cancellations also increased by 77%. While the net growth remains positive at 25%, it is important to acknowledge that the rise in cancellations is not an insignificant number.
Moreover, Netflix experienced a loss of viewers in Portugal (13%) and Spain (1 million subscribers) due to the password crackdown. Although Netflix considers this a temporary dip and expects these viewers to subscribe again, the outcome remains uncertain.
Churn is an ongoing concern for streaming platforms, whether due to password sharing, changing viewer preferences, or increased competition. It is unlikely to stop simply because Netflix has a good quarter.
Additionally, while Netflix previously avoided revealing certain metrics, the introduction of the ad tier will necessitate the disclosure of new metrics, exposing some of the “fuzzy math” the company employed in the past to define a “view.” The ad tier offers measurable and quantifiable data, which affects Netflix’s traditional approach. The platform has continuously evolved its definition of a “view,” and its latest determination incorporates factors such as hours viewed divided by runtime, recognizing that not all shows have the same length.
Netflix’s upcoming earnings report may indeed be positive, supported by various data points. However, as seen before, one strong quarter does not define a company. To evaluate what is and isn’t working, it is crucial to assess several consecutive quarters of growth. Analysts like Mark Mahaney from Evercore ISI emphasize the potential for both positive and negative surprises. The path to rebuilding a giant like Netflix will not be a quick process, and the true impact of the company’s changes will become clearer over time.
Investors should view this quarter as an important milestone in Netflix’s journey but understand that the next quarter’s results will be even more telling. The effects of the company’s recent changes will have had more time to take effect, providing a clearer picture of its direction. Patience is required, as this prolonged period of buffering will ultimately shape the future of Netflix and the streaming sector as a whole.
Netflix Stock Performance
Netflix stock has gained nearly 53% year-to-date and by 136% over one year, outperforming the S&P 500 by a wide margin.
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