Once a darling on Wall Street, with a stock price that soared 6,230% during the 10-year period that ended November 2021, Netflix (NFLX 1.18%) has since come crashing back to Earth. The business has long prioritized membership growth ahead of producing cash, but with a loss of 200,000 subscribers in the first quarter of this year, investors are questioning the company's prospects. Shares are down 71% so far in 2022.
The leading streaming service reports second-quarter financial results on Tuesday, July 19, and there's one critical metric that I'll have my eyes on: the addition (or loss) of subscribers.
Show me customer growth
Not only did Netflix shed members in Q1, but in the just-ended quarter, management expects to lose another 2 million. Intense competition from the likes of direct rivals like Walt Disney's Disney+ and Hulu, Amazon Prime Video, and Warner Bros Discovery's HBO Max was cited by the leadership team as a major factor negatively impacting performance.
For a business that went from just 21.6 million paid subscribers at year-end 2011 to 221.8 million at the end of 2021, the disappointing numbers recently were a shock to shareholders who've become accustomed to rapid growth. For what it's worth, management forecast sales to rise 9.7% year over year in Q2.
Investors will want to not only see the company lose fewer than the 2 million subscribers that management expects, but maybe even post net additions. This situation would certainly be a positive surprise, with the potential to send shares higher after the earnings announcement. Kannan Venkateshwar, a research analyst at Barclays, thinks Netflix will lose 2.8 million members in the quarter, a figure that would surely crush the stock.
Netflix, like most other businesses, is unfortunately facing a harsh macroeconomic environment. Persistent inflation that's at a 40-year high has caused the Federal Reserve to aggressively hike interest rates, and many are worried that a recession is in the near future. In fact, Netflix has laid off staff twice this year, bracing for an economic slowdown.
It's not all bad news, however. According to data from Nielsen, Netflix still represents the most time spent on a streaming service per day in the U.S. And streaming overall only accounts for 31.9% of total TV time. This puts things into perspective, and shows that there is still ample opportunity for Netflix to drive higher levels of engagement.
Besides making inroads in the gaming space, it is now well-known that Netflix is planning to introduce a cheaper, ad-supported tier, recently announcing that the business will partner with tech giant Microsoft. Not only should this boost the company's ability to attract new members, particularly those who are more price-sensitive, but it will support even more revenue growth, a necessary component for Netflix to continue investing tens of billions each year into fresh content.
And the business is still a leader in creating top-notch content, like the smash hit Stranger Things, whose newest season has amassed a whopping 1.3 billion viewing hours in the first 28 days after release, easily making it the most popular English-language series in Netflix's history. Splitting up the newest season into two parts was a smart move by management to prevent customers from simply bingeing and canceling their subscriptions.
Despite some headwinds, Netflix is still the biggest player in the streaming wars right now. But next week's highly anticipated financial report will be one of the most-watched releases this earnings season. For the troubled stock, nothing matters more than subscriber numbers.