It's been a tough year for Netflix (NFLX -0.04%) investors. After climbing to a new all-time high late last year, the stock has been in freefall, plunging roughly 75%. After Netflix experienced a growth spurt during the pandemic, subscribers left for greener pastures, as the streaming giant posted its first decline in subscriber numbers in more than a decade.
Yet with all the negativity currently baked in, and a number of potential catalysts on the horizon, it wouldn't take much to send Netflix stock soaring. With its second-quarter earnings due after the market closes on Tuesday, July 19, here's what investors should be watching.
Netflix's own bosses made a dour prediction
After the company forecast growth of roughly 2.5 million subscribers for the first quarter of 2022, Netflix investors were taken aback when it reported a loss of roughly 200,000 subscribers, its first such decline in more than 10 years. If that weren't enough, management added fuel to the fire, suggesting it could lose as many as 2 million more subscribers in the second quarter.
Netflix cited a number of factors as contributing to the decline, including the war in Ukraine, high inflation, and password sharing by as many as 100 million households. The company also suggested that supply chain disruptions slowed the rate of adoption for smart TVs -- a factor that weighed on Roku in its recent report.
Yet even as the streaming pioneer faces headwinds, there are a number of catalysts that could buoy investor sentiment, any one of which could send the stock soaring.
Netflix has some irons in the fire
Netflix has already implemented a strategy to reduce password sharing, rolling it out to its Latin American audience in March. Members will be allowed to add sub-accounts to their existing profile, using a lower price as an incentive, for up to two viewers that don't live in their household. The company also introduced a feature that allows users to transfer an existing profile to a new account, helping maintain their viewing history, watch list, and personalized recommendations. Each of these approaches could encourage freeloaders to sign up for a paid account.
While it's something that's largely out of Netflix's control, supply chain disruptions and chip shortages are gradually easing, which could help fuel a rebound in smart TV adoption, which in turn could boost subscriber numbers.
The biggest catalyst, however, is the pending addition of an ad-supported tier, something Netflix had long resisted. Reports suggest the company has been talking to a number of potential advertising partners, while also working to hire an executive to manage its ad-supported efforts. While estimates vary, Netflix could generate incremental ad revenue of $2.5 billion and increase its overall revenue in the U.S. by 21%. Once the company has established an ad-supported tier in the U.S., it will likely export the model to other countries, which would further supplement its revenue.
Limited downside, plenty of upside
It's worth noting that Netflix's valuation hasn't been this low in nearly a decade, currently selling at just 2 times next year's sales estimates.
Given the rampant pessimism baked into Netflix, it wouldn't take much to send the stock higher when the company reports earnings next week. Any indication that its plans to reduce password sharing are bearing fruit, any signs of an improvement in the smart TV supply chain, or any positive updates regarding its plans to augment its income with advertising could all send the stock higher.