Netflix Has a Big Problem. Here’s the Math That Might Fix It

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Netflix

shares are off 70% this year, due in large part to the streaming-video company’s disastrous first-quarter earnings. Among other things, Netflix lost 200,000 net subscribers in the March quarter—and projected losing two million more in the current one. Netflix CEO Reed Hastings has aired two fixes: reducing password sharing and exploring a lower-priced, ad-supported subscription tier.

In a Tuesday note,

Citigroup

analyst Jason Bazinet laid out how an ad model could drive free-cash-flow growth and revive investor interest in Netflix. (He isn’t convinced of a big payoff from cracking down on password sharing.) The shares, he writes, lack an obvious investor base: “Once Netflix’s sub base began to contract, investors stopped viewing the firm as a growth stock. But given the lack of [free cash flow], value investors are unsure how to assess the firm.”

His math: If Netflix can generate $10 of ad revenue per U.S. user a month in a lower-priced tier, it can cut its monthly price to $6 and still generate incremental revenue from users now paying $9.99 for base-level service. He sees $900 million to $3.6 billion in added free cash flow in the U.S. Abroad, he sees the potential for $3 a month in ad revenue, which also should allow a $6 base service. Cash flow would rise by $800 million to $3.1 billion a year. So, Netflix’s annual global cash flow could climb by $1.7 billion to $6.7 billion.

Ironically, Bazinet’s note came on a day when ad-supported internet stocks got crushed by

Snap
’s
profit warning. But Netflix reportedly could launch an ad-supported tier before the end of 2022—faster than Hastings implied. Stay tuned for the next earnings call, likely in late July.

Monday 5/30

Equity and fixed-income markets are closed in observance of Memorial Day.

Tuesday 5/31

HP
Inc.
and

Salesforce.com

announce earnings.

The Institute for Supply Management releases its Chicago Business Barometer for May. Consensus estimate is for a 56.8 reading, slightly higher than April’s 56.4.

The Conference Board releases its Consumer Confidence Index for May. Economists forecast a 4.7% month-over-month decline to 102. That would be the lowest figure for the index since February 2021. Retail spending has remained robust, even as consumer confidence has waned.

Wednesday 6/1

Chewy
,

GameStop
,

Hewlett Packard Enterprise
,

NetApp
,
and PVH release quarterly results.

AmerisourceBergen
,
LKQ, and

Paccar

hold investor meetings.

Alphabet
,

Comcast
,
NXP Semiconductors, and

Walmart

host their annual shareholder meetings.

The Bureau of Labor Statistics releases its Job Openings and Labor Turnover Survey. Expectations are for 11.4 million job openings on the last business day of April, slightly fewer than the 11.55 million in March, which was a record. The labor market remains very tight, but more and more companies have recently announced layoffs or hiring freezes. Both Amazon.com and Walmart recently said that they were overstaffed.

The ISM releases its Manufacturing Purchasing Managers’ Index for May. Consensus estimate is for a 54.8 reading, roughly even with the April figure, which was lowest since September 2020.

Thursday 6/2

Cooper

Cos.,

CrowdStrike Holdings
,

Hormel Foods
,

Lululemon Athletica
,
and

Okta

hold conference calls to discuss earnings.

Netflix
,

Nvidia
,
and

PayPal Holdings

have their annual meeting of shareholders.

ADP releases its National Employment Report for May. Private-sector employment is expected to have increased by 350,000 jobs after a gain of 247,000 in April. The private sector has added 1.1 million net jobs since the start of the pandemic, according to ADP.

Friday 6/3

The BLS releases the jobs report for May. The economy is expected to add 317,500 nonfarm jobs, after a gain of 428,000 in April. The unemployment rate is seen edging down from 3.6% to 3.5%, which would match a half-century low.

Cigna

hosts its 2022 investor day in New York. The company will update its financial outlook at the meeting.

ISM releases its Services Purchasing Managers’ Index for May. Economists forecast a 56 reading, about one point less than the April figure.

Write to Eric J. Savitz at [email protected]