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What matters for Netflix’s Q1 earnings?


Netflix is among those tech companies slashed by a weakened growth outlook in the final quarter. The company’s share price has plunged 36.71% year-to-date and halved from its November 2021 high.

Slower growth in new subscribers and squeezed profit margins are the key factors leading to the sell-off. Whether the live streamer can beat the already lowered expectation will be the focus of its Q1 earnings report.

Slowing new subscriber growth amid severe competition

In the final quarter of 2021, Netflix added 8.28 million new subscribers, for a total of 221.84 million paid memberships, which accounted for the largest market cap in the streaming world, followed Disney Plus, which has 129.8 million subscribers. However, Disney Plus may have added more subscribers in the first quarter, taking members to over 200 million.

Amazon Prime also claimed more than 200 million members worldwide in 2021 despite most stemming from its e-commerce free members. Netflix forecast the slowest growth of 2.5 million subscribers for the first quarter, which could be less than its rivals. Plus, the company reportedly has less than 1 million subscribers in Russia, where it has halted production and services. Any number weaker than 2.5 million for new subscribers or a substantial drop in existing members could slash the share price further.

Improved profit margin expected

With rapidly growing revenue, Netflix’s growing content costs are hurting its operating margin, which fell to 8.2% in the final quarter from 23.5% previously. While exclusive content becomes a key driver of new subscriptions, the live streamer realises that weakening revenue growth per subscriber is hurting its profit margin.

To respond to the drop, Netflix is moving to get content spending under control, to match the slowing growth of new subscribers. As a result, the company is expected to post an improved operating margin of 22.3% versus 8.2% in the last quarter, and EPS of $2.86 versus $1.33 in the first quarter a year ago. Consensus calls for $2.95 of EPS in Q1, according to the Wall Street Journal, with 47% of analysts recommending a 'Buy', and 36% of those suggesting a 'Hold'. For a long-term investor, the company’s sharply discounted shares could be a bargain, with a P/E ratio down to 31 currently, from above 80 in early 2021.

Medium-term downtrend phase remains intact

Source: CMC Markets (14 April 2022)

(Click to see the enlarged chart)

The Netflix share price [NFLX] has continued to underperform the benchmark S&P 500 and its respective communication services sector by a wide margin of around 5x and 3x year-to-date respectively.

From a technical analysis perceptive, the medium-term downtrend phase of Netflix remains intact, as price actions continue to evolve within a descending channel in place since its current all-time high of 700.43 printed on 17 November 2021, and capped below by its 55-day moving average since 1 December 2021. Medium-term downside momentum is not showing any signs of abating, as depicted by the recent observations seen in the daily RSI oscillator, where it has shaped a bearish breakdown below its corresponding ascending support right below the 50% level.

If the 412.96 key medium-term pivotal resistance (also the upper boundary of the descending channel) is not surpassed to the upside, Netflix may see a further down move towards the next support zone at 283.30/252.30 (24 September 2019 swing low area and 0.618 Fibonacci extension of the ongoing down move from the 17 November 2021 high to the 24 January low, projected from the 1 February high).

On the flipside, a clearance with a daily close above 412.96 may put a pause to the medium-term impulsive down move sequence for a corrective rebound towards the next resistance at 458.80 and 506.90 (close to the 50% Fibonacci retracement of the current down move from the 17 November 2021 high to the 14 March low) and the former range support before the price gapped down after the prior earnings release on 20 January 2022.

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