Netflix - will a new ad-supported tier solve subscriber woes?

Stock Of The Week: Netflix

Will a new ad-supported tier solve Netflix subscriber woes?

Netflix fortunes have taken a turn for the worse over the past few months. A glance at the charts tells that side of the story. From highs just shy of $700 at the end of 2021, Netflix is now trading below $200.

Those two enormous down gaps have come on the back of the last two poor earnings reports and disappointing guidance. For now, the Netflix share price is consolidating in a range between $162 & $205. On Friday, Netflix stock had its best performance since January, rallying a little over 8% and closing at the highs.

Will this weeks’ earnings report offer some relief?

Netflix problems came all at once. Concerns over peak subscriber growth in developed markets, increased competition from a growing number of streaming rivals, and a more discerning consumer feeling the pinch from inflation.

On the first drawdown, billionaire Bill Ackman (Pershing) loaded up on Netflix stock, saying

“the opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance.”

After earnings disappointed in the following quarter, Ackman bailed on the position: "While Netflix's business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty,"

Ackman’s Pershing realised a $400 million loss in the process, and the point stood. Netflix is undergoing a fundamental transformation. One of the major changes is the push for an ad-supported tier, and markets will have a keen eye for further details from the earnings call on Tuesday.

The streaming giant has just announced a partnership with Microsoft as their global advertising technology partner:

Netflix: "Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering. More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members."

Microsoft: At launch, consumers will have more options to access Netflix’s award-winning content. Marketers looking to Microsoft for their advertising needs will have access to the Netflix audience and premium connected TV inventory. All ads served on Netflix will be exclusively available through the Microsoft platform.

On the surface, it’s a win-win proposition. Netflix gains expertise and tech support from Microsoft, while Microsoft gains exclusive advertising access to the Netflix audience, which could boost their offering in the advertising industry, and potentially close the gap to giants such as Google.

Plenty to focus on for the earnings report and subsequent call this week:

Netflix had forecast the loss of a further 2 million subscribers in the second quarter. Will this be the case, and are further losses expected?

Cost-cutting, layoffs and hires. As growth slows, trimming expenditure is likely. Netflix has recently laid off 450 workers. More to come?

Just how big will the FX hit be? Netflix’s steadfast refusal to hedge their FX exposure has cost them over the years. Recent dollar strength could mean these costs hit new highs.

So, plenty of questions as Netflix embarks on a new business trajectory. Do tougher challenges await? Or is this the start of the turnaround?

Not investment advice. Past performance does not guarantee or predict future performance.