Shares Jump Despite Subscriber Losses

Key takeaways

• Netflix earnings for Q2 2022 dropped Tuesday after market close
• The streaming giant posted a loss of 970,000 subscribers compared to its previous loss forecast of 2 million
• Still, Netflix struggles to reclaim its pandemic-era growth, with Q3 expected to add just one million net new subscribers
• The company hopes that monetizing password sharing and adding an advertising tier will reinvigorate growth prospects

Tuesday was a busy day for investors with over 100 companies releasing quarterly numbers. Among the largest of these was Netflix, which reported Q2 2022 earnings after market close.

Unfortunately for the world’s largest streaming service, its quarterly earnings came in mixed. Amid ongoing inflationary and competition pressures, months of share price declines and media backlash, Netflix bled 970,000 subscribers last quarter alone.

While these losses are significant (nearly five times the losses seen in Q1), it’s better than the 2 million subscribers Netflix originally predicted it would lose. After closing out the day at $201.63 per share, Netflix gained nearly 8% in after-hours trading. All told, year-to-date losses declined slightly to “just” 66%.

Netflix earnings by the numbers

In addition to a narrower subscriber loss than expected, Netflix earnings also showed revenue of $7.97 billion. While that’s lower than the $8.05 billion consensus, it still represents 9% growth year-over-year. Adjusted earnings per share came in strong at $3.20, higher than the $2.98 expected.

Netflix’s mixed numbers are the result of a broader subscriber slowdown mingling with increased inflationary pressures. And as the dollar has grown stronger, foreign revenues appear weaker due to increasingly-unfavorable foreign exchange rates.

While several factors likely played into its better-than-expected subscriber numbers, Netflix championed the release of “Stranger Things” season four as one of its saving graces. The production broke Netflix’s prior records for its largest premiere weekend ever and saw 1.3 billion hours view in its first month. “Stranger Things” also received multiple Emmy nominations for the season.

Future expectations

Netflix also used its earnings report to release a few future expectations.

With quarterly defections lower than originally estimated, Netflix sees around one million net adds between July-September. (Though that still pales in comparison to Wall Street’s 1.84 million consensus.)

The company also expects free cash flow to reach “approximately +$1 billion, plus or minus a few hundred million dollars (assuming no material further movements in [foreign exchange]).”

In a letter to shareholders, Netflix attributes its financial headwinds to factors like increased competition, password sharing and a sluggish economy mingled with sky-high inflation. Management also warned that a stronger U.S. dollar will impact its international revenue, which comprises some 60% of its top line.

Noted Netflix: “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.”

Examining Netflix’s challenges

In the first half of 2022, Netflix has faced one struggle after another.

For instance, April’s Netflix earnings report showed that the company shed 200,000 subscribers, its first loss in over a decade. Following the news, the company’s value plunged 35% practically overnight.

Netflix also laid off hundreds of employees this year, claiming a $70 million charge for severance costs. Another $80 million non-cash impairment charge aims to cover costs incurred altering its real estate leasing agreements during the restructuring process.

These changes come as Netflix faces a barrage of less-than-stellar macroeconomic trends, including rampant inflation and recession speculation.

Additionally, competition continues to ramp up, with the likes of HBO Max, Disney+ and Apple TV+ investing heavily in their own services. Netflix also remains pricier than the alternatives, meaning it could be the first to go when subscribers trim their budgets.

Thanks to ongoing headwinds, analyst predictions for Netflix’s 2022 net subscriber adds have dropped from 20 million to under 5 million. But looking forward, Netflix may have plans – albeit potentially unpopular ones – to ease the pressure.

Netflix in the news: mixed responses to profit-seeking plans

In recent years, Netflix has struggled to diversify its revenue streams, from adding video games to starting an online store. Now, it has some new ideas.

Adding ads

Netflix CEO Reed Hasting has long avoided the possibility of adding advertising revenue to the world’s first streaming behemoth. But amid its post-pandemic slump, Netflix has few other options to boost its numbers.

While whispers of an ad-supported tier were confirmed earlier this year, it was just last week that Netflix revealed a partnership with Microsoft to help launch its new revenue stream. The first ad-based memberships are expected to go live in early 2023 “in a handful of markets where advertising spend is significant.” From there, the company will “listen and learn and iterate quickly to improve the offering.”

The ad-based tier will be cheaper for subscribers, potentially boosting membership rates while offering better prices. Netflix notes that its existing plans will remain ad-free for those who prefer to pay for the privilege. Management appears optimistic about its plans, noting that, “Over the long run, we think advertising can enable substantial incremental membership and profit growth.”

Goodbye, free passwords

It’s no mistake that “Netflix” and “Covid lockdown” often shared the same breath. When pandemic health measures took effect, people flocked to the streaming service for entertainment and fun. Unfortunately, as pre-pandemic life resumes, Netflix struggles to maintain existing loyalty – let alone attract new signups.

When business was good, Netflix could afford to ignore – and often encouraged – password sharing. But with slowing growth and an estimated 100 million households borrowing passwords, cracking down on freebies seemed an obvious choice.

This year, the company confirmed that it’s testing a few methods to ensure primary accountholders can hand out passwords – as long as Netflix can profit, too.

In March, the first wave of tests rolled out in Chile, Costa Rica and Peru, allowing primary users to add additional homes for $2.99 each. This week, Netflix expanded its testing grounds to the Dominican Republic, El Salvador, Guatemala, Honduras and Argentina.

While Netflix has encountered a few hiccups along the way – including struggling with enforcement and user backlash – it hopes to crack down on global password sharing in the next few months.

Looking to the future

With 221 million global subscribers, Netflix’s appeal to content creators and advertisers remains strong. And with an estimated 100 million unpaid households waiting to be monetized, its profit-boosting potential is robust, too. (Even if the service loses some members in the process, 100 million homes at $2.99 each is nothing to sneeze at.)

But the company isn’t relying on new revenue streams alone to boost its appeal to investors. Netflix also plans to enhance its content library, adding jewels like new seasons of “The Crown,” “Stranger Things,” and a big-budget action moving starring Chris Evans and Ryan Gosling.

And, despite all the media hype around subscriber numbers and password sharing, Netflix continues to make money. That’s more than competitors like Peacock and Disney+ can say.

Unfortunately, from an investment standpoint, it’s not enough for the company to make money – the stock also has to rake in the dough, too. Unfortunately for Netflix investors, the company’s long-term plans are unlikely to produce short-term gains. And if the market continues to lose faith in Netflix’s potential, investors may see further losses.

Netflix earnings: a short-term blip to long-term investors

As an investor, Netflix’s mixed news probably doesn’t come as a total shock. But amid the broader tech selloff, increased competition and an ongoing struggle to maintain relevance and profits, it’s hard to justify adding Netflix to your portfolio at the moment.

But instead of navigating this uncertainty and riskiness on your own, investors can turn to Q.ai to invest with your risk tolerance and timeline in mind. With our Emerging Tech Kit, you can jump on the tech bandwagon – without having to worry about short-term distractions like fluctuating subscriber numbers.

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