Investors have some burning questions heading into the upcoming earnings report from Netflix (NFLX 2.67%). The streaming video giant shocked Wall Street in mid-April when it projected millions of subscriber losses in the current quarter. Executives also said sales would rise by just about 10% in Q2, or about half the rate that management had been targeting as recently as last year.
That slowdown is a big concern, but I see two more important issues that Netflix should clear up in this earnings announcement. The first one impacts growth over the short term, and the other sits at the heart of the investing thesis for this battered stock.
Let's take a look at the main worries heading into the report on July 19.
1. How low can growth go?
The immediate question is where Netflix's growth rate might stabilize after declining sharply in each of the last few quarters. It was only about a year ago that the company was posting robust sales expansion of 20% or more. And that level isn't arbitrary but reflects major financial goals for the business. "The big prize is keeping revenue growth at 20%," Co-CEO Reed Hastings said in early 2021.
NFLX Revenue (Quarterly YoY Growth) data by YCharts.
Since then, Netflix's year-over-year quarterly growth rate has dropped from about 24% to below 10%. We'll learn on Tuesday whether executives see a further decline ahead in Q3. On the other hand, the company might have spurred renewed engagement through popular content like season four of Stranger Things.
Netflix took a different approach to that show's latest season, too, by staggering its release. That shift might support higher subscriber numbers at the start of fiscal Q3, but it could also help lift engagement overall if it becomes a wider practice.
2. Is the flywheel broken?
Netflix's growth approach in the past decade has had a central theme that management has described as a virtuous cycle. It goes like this: The company spends cash on content and on improving the streaming experience. In response, more people sign up for the service and Netflix has room to raise prices, giving it more cash to invest.
The best explanation for the stock price collapse in 2022 is the fear that this cycle has been broken. Netflix boosted spending on content over the past year and released dozens of big original series and movies. Yet engagement is flagging, and new user signups are slowing.
Competition is playing a role, and so is the proliferation of free or deeply discounted streaming content options. Netflix is aiming to neutralize that pricing threat by offering its own ad-supported tier soon. The competition threat isn't new, either, and might even make the streamer a better business over time by forcing it to raise its game in areas like show content, video games, and the tech platform itself.
There's no shortage of areas Netflix can attack here, and its large, cash-flow-positive business and lead in the industry should give it a leg up against most of its peers. But investors won't be excited about Netflix as a growth stock again until the company can demonstrate a clear line between the investments it is making in the business and accelerating subscriber gains.
