Shares of Netflix (NASDAQ:NFLX) rose on Wednesday after the streaming giant released second-quarter results and third-quarter guidance that was better than expected, prompting analysts to note the slowdown could stabilize.
The paid streaming TV leader lost 970,000 subscribers in the second quarter, according to a statement on Tuesday. That was less than half of what Wall Street feared, largely thanks to a new season of “Stranger Things,” the service’s most popular English-language series.
Analysts Lower Their Price Target and Earnings Estimate on Netflix
Credit Suisse analyst Douglas Mitchelson, who rates Netflix shares as neutral, noted that the loss of 1 million subscribers in the second quarter was better than expected. With indications that it could add 1 million subscribers in the third quarter, the uncertainty is still “elevated” but there is light at the end of the tunnel.
Mitchelson lowered his price target to $263 from $360 after the results.
Macquarie analyst Tim Nollen said the results from Netflix offered “a little light relief”, although it lowered earnings estimates.
Nollen lowered estimated earnings per share for 2022 to $9.29 from $10.11 and reduced estimated earnings per share for 2023 to $9.07 from $10.28.
Deutsche Bank analyst Bryan Kraft, who has a holding rating on Netflix (NFLX), noted that there were “some positive developments” in the second quarter earnings and conference call, including the fact that spending on cash content would be moderate and that there would be “significant growth” in free cash flow.
However, there were also a few negatives, including the fact that subscriber growth is still historically low, and revenue-boosting plans — account sharing billing and an ad-supported plan — are unlikely to yield short-term results.
“We will be looking for signs that Netflix’s plan to reaccelerate subscriber and revenue growth is working next year as the company begins to roll out its account-sharing and advertising initiatives,” Kraft explained.
Netflix to Launch an Ad-Supported Version
Management responded to the fall by cutting costs and adjusting its strategy on several fronts. The company plans to introduce a cheaper version of the service with advertising later this year, and is testing ways to charge customers for password sharing.
On Tuesday, Netflix said the ad-supported option would likely hit the market “around the early part of 2023” and launch in a “handful of markets where advertising spend is significant.”
Chairman Reed Hastings has long positioned Netflix as an ad-free alternative to cable TV, but now says ads are needed to attract people who find the service too expensive.
Netflix said its share of total U.S. TV viewing hit an all-time high in June at 7.7%.
“Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content, and marketing as we’ve done for the last 25 years, and to better monetize our big audience,” the company said in a letter to shareholders.
For the second quarter, revenue rose 8.6% to $7.97 billion, Netflix said. That missed Wall Street estimates of $8.04 billion, partly because of the strong dollar.
Netflix lost 1.3 million customers in the United States and Canada, its largest region, and another 770,000 in Europe, the Middle East, and Africa, its second largest. These are the steepest quarterly declines the company has reported since it began breaking into those markets.
Growth in the Asia-Pacific region offset these declines. Netflix added 1.1 million customers in APAC, after cutting prices in India.
Netflix has raised its prices several times and is now one of the most expensive streaming services. The company just called on Microsoft Corp. (NASDAQ:MSFT) to manage ad sales and technology.
The total number of subscribers in the second quarter amounted to 220.7 million, against estimates of 220.2 million. Earnings of US$3.20 per share beat analysts’ forecasts.
For the third quarter, Netflix forecasts revenue of $7.84 billion, lower than Wall Street’s estimate of $8.1 billion. The company forecasts earnings of $2.14 per share, against estimates of $2.72, and says total membership will reach 221.7 million, which is also lower than estimates.
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