It's time for Netflix (NFLX 3.98%) to throw the market a plot twist that its recently scorched investors need. The leading premium streaming-video service reports quarterly results on Wednesday afternoon, and it's bumping up against a rough narrative.
The stock is trading lower in 2019, having shed 22% of its value since posting disappointing second-quarter results three months ago. The looming launch of rival services and a rare subscriber forecast miss last time out have been weighing on the shares. If Netflix wants to turn its fortunes around it will have to happen later this week, and only the out-of-favor entertainment giant can write its own Hollywood ending. Let's go over a few things that will have to happen to get the stock back on track.
Image source: Netflix.
1. The 7-million-member challenge
The biggest reason for the shares selling off last time out was Netflix falling short of the 5 million it was previously forecasting in net paid subscriber additions for the three months ending in June. Netflix grew its rolls by only 2.7 million paid global streaming accounts, the largest whiff in recent memory. Netflix's guidance calling for 7 million net adds in the quarter it will discuss after Wednesday's market close wasn't enough to soothe investors this summer, and obviously the stock continuing to drift lower suggests that Netflix is about to miss its own mark again.
Some of the bearish analyst moves heading into this week's report have pointed out the difficulty of Netflix's clearing the high bar it has set for itself this time. Investor confidence will be rattled if the historically conservative platform operator misses again this week. It won't be pretty, and it will be hard to take the fourth-quarter outlook it will initiate seriously if it falls flat on its face again. In its letter to shareholders explaining its uninspiring second-quarter performance, Netflix pointed out there will be lumpiness to its forecasts. It went back a few years to point out that it has whiffed once in each of the three previous years. But things will be different if it misses twice in the same year.
2. Reshaping the metrics of evaluation
Netflix was able to land near its top-line target of $4.928 billion and exceed its $249 million goal for earnings in the second quarter, despite having fallen short on its subscriber growth forecast in its previous financial update. Netflix made it work because average revenue per user is on the rise as a result of a price hike in some markets, including the U.S., earlier this year. It also helps that net additions in any single quarter are a small tile in a much larger mosaic, but let's focus on Netflix ramping up its ability to monetize its traffic.
Subscriber growth will decelerate at this point, and the narrative has to turn to how Netflix can cash in on its massive audience if it wants to be a market darling again in this era of slowing membership gains. There are a lot of tools at Netflix's disposal, but it's been reluctant to turn to them in the past. Netflix will want to emphasize revenue and earnings growth over the subscriber growth that most have used to measure its success in the past.
3. Playing down the rivals
A big thing keeping Netflix back this year is the hype that Disney (DIS 1.81%) and Apple (AAPL 0.56%) are generating for their streaming premium services, which will launch next month. Disney+ and Apple TV+ are launching with compelling original content and aggressive pricing, and that has made Netflix seem vulnerable. After four substantial increases in pricing since 2014, it seems that there is no more elasticity with the stock that used to be a top consumer discretionary stock for growth investors.
Even if Netflix somehow nails its subscriber goal or finds a way to emphasize more flattering metrics, it won't matter if it can't ease investor fears that Disney and Apple will eat its lunch in the coming weeks. Netflix will need to play up the expanding market or its earlier successes in dominating cheaper competition. Netflix knows when to play it humble and safe, and this week won't be one of those times.
