Earnings season hasn't been kind to Netflix (NFLX 3.04%) lately. It's a gloomy backdrop as the streaming service prepares to report fresh financials shortly after Tuesday's close this week. Everyone will be watching Netflix, especially now that it has proven mortal after recent layoffs and missing its own subscriber guidance in three of the past five reports.
After Netflix shocked investors three months ago with a 200,000 sequential decline in streaming subscribers for the first quarter -- a stunning reversal from the 2.5 million net additions it was targeting for the period -- pessimism is already baked into the shares. Back in April, Netflix warned investors that it expects the net defections to clock in at 2 million this time around. It's like lowering a limbo stick at an ant party. Netflix stock is down 69% this year even after a rare 8% rally on Friday. If Netflix is showing signs of finally bottoming out it's going to have avoid finding a new way to break shareholder hearts on Tuesday afternoon.
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Master of puppets
Friday's rally wasn't a matter of the market trying to jump in ahead of earnings. In fact, a pair of Wall Street pros had put out bleak analyst notes last week. They wanted to plant the flag on a potentially problematic report. The stock popped because Netflix teamed up with Microsoft (MSFT 1.69%) to work on its upcoming ad-supported tier.
Microsoft may seem to be an odd choice to provide the tools for Netflix's digital advertising ambitions, but it does make sense. Many of the more obvious choices have streaming platforms of hubs that compete with Netflix. It also doesn't help that Netflix and Microsoft have a history of working together. Microsoft's Xbox was the first gaming console to offer a Netflix app, and Netflix co-CEO Reed Hastings served on the board of directors for the software giant before stepping down a decade ago.
The two concerned analysts felt that there wasn't enough pessimism baked into this week's light expectations. The rising dollar and a shift in consumer trends for streaming services could be problematic. Their ears to the ground also suggest that churn is climbing and engagement levels are dropping. If they're right, naturally the stock can continue to move lower.
Where are market expectations for Tuesday afternoon's telltale update? Back in April, Netflix was guiding for $8.053 billion in second-quarter revenue -- up 9.7% from where it was a year earlier. The consensus now is a hair lower, with analysts holding out for a 9.5% increase. The $3 a share in earnings that Netflix was forecasting for the quarter is roughly flat with the $2.97 a share it cranked out in the second quarter of last year. Analysts who had latched on to Netflix's April target of $3 a share in earnings have whittled that down to $2.96 per share now.
It's easy to see why analysts from Morgan Stanley and Bank of America were concerned last week. They've seen some trends continue to deteriorate since Netflix gazed into its crystal ball three months ago, but their peers are just a smidgeon below from what the company itself was prognosticating just two weeks into quarter. It doesn't mean that the stock can't move higher when the market opens on Wednesday. Netflix is officially or reportedly working on a lot of things. Beyond the digital advertising initiative that is already in motion, there are catalysts in gaming, live streaming, and theatrical distribution that could surface in the earnings report.
These are challenging times, but Netflix continues to be the leader of streaming service stocks. With the shares out of favor, Netflix knows that it can't be content with the situation just because it's the king of content.
