Recent earnings announcements haven’t been pleasant experiences for Netflix shareholders. The last two have resulted in sharp falls in the Netflix share price, with the most recent Q1 announcement sending the shares back to levels last seen almost five years ago.
Netflix share price down over 70%
Since the record highs of November last year, the shares have fallen over 70%, with the falls mainly centred around concern over slowing, and or, falling subscriber numbers.
Today’s Q2 numbers appear to have been received positively despite some notable misses, not only in the headline numbers, but also in their Q3 outlook, with the shares rising after hours, building on the 5.5% gains seen in the leadup to tonight's numbers. In Q1 Netflix reported its first quarterly decline in subscribers in a decade, losing 200,000 customers in the process, against an expectation that it would gain 2.5m, reducing total subscribers from 221.8m to 221.64m.
Revenue up, subcribers down less than expected
Given that Q2 expectations were set so low, with expectations of a reduction of 2m subscribers, the fact that the number of lost subscribers came in lower than expected, with a fall of 970,000, was a relief, while revenues came in at $7.97bn, a 9% rise year on year.
For Q3 Netflix says it hopes to start adding back subscribers, with hopes that they will see growth of 1m, reversing the decline in Q2. For Q3 revenue forecasts were lower than expected at $7.84bn, which would be a 4.7% increase on the same quarter a year ago. Profits forecasts also came in lower at $2.14, below estimates of $2.72 a share.
While revenues grew by 9%, the stronger US dollar continues to have a negative impact on its earnings potential, with 60% of its revenue coming from outside the US, which probably helps explain the lower revenue and profit forecasts for Q3. With Netflix producing films and TV in more than 50 countries, and three out of its six most popular TV seasons using non-English language titles, it seems odd that the company doesn’t have some mechanism to mitigate its FX exposure. Netflix did reiterate that is expects full-year operating margin of 19% to 20%.
Netlfix faces fierce competition
The current slowdown in subscribers has always been the big fear for Netflix shareholders, as its deeper-pocketed rivals start to eat into its market share, cannibalising its own streaming model with offerings of their own. It started with Disney when it started removing all of its content from the Netflix platform in 2017, as they looked to build on an offering of their own. The Star Wars content soon followed in 2019, as the various challengers started to build up their offerings, and it now appears that the fight is truly being joined.
With its much deeper pockets, Disney+ is slowly emerging as its main new rival, while Amazon is also spending big on new content, with a new Lord of the Rings series called Ring of Power. With Paramount+ entering the fray of the ultra-competitive streaming market with a strong catalogue of its own, including the new Star Trek series “Strange New Worlds” as well as a new season of “Star Trek Discovery”, which used to be on Netflix, the field is becoming ever more crowded.
Netflix has fought back, bringing forward its latest season of Stranger Things over two quarters which has offered a respite; however, the falls in subscriber numbers in H1 does raise questions as to whether Netflix will be able to build substantively in the same way it was able to pre-pandemic, hence the recent share price weakness.
Netflix recently teamed up with Microsoft on a lower cost advertising model, which does raise concerns that a lower costs service might cannibalise its higher value subscription model. This is expected to launch in the early part of next year. Netflix also said it was looking to better monetise the 100m+ households who aren’t directly paying to use the service. A trial approach is being used in its Latin American market in an attempt to learn more about how to do this.