What to Expect From Netflix’s Q1 Earnings – and Wall Street’s Mysterious Response

·3-min read

There’s a secret ritual one Wall Street investment advisory chief uses to focus on a quarterly prediction about how Netflix stock will trend after an earnings report: “I play ‘Mysterious Ways’ by U2.”

The longtime stock picker said the song is about man’s struggle to understand the complexities of the unknown. Netflix, which reports first-quarter results Tuesday after the closing bell, is legendary on Wall Street for a stock that can plunge when it beats expectations or rally when it doesn’t. Instead, investors view subscriber growth as the key market-moving data — forcing profit, loss and revenue line items to take a back seat.

This marks the 80th quarter reported since the company’s 2002 initial public offering. The market will pay close attention to European subscriber growth, suspending Russian operations after the Ukraine invasion, and the other war that pits Netflix against rival platforms put together by acquisitive entertainment giants like Disney and Warner Bros. Discovery. They may also pay close attention to any signals that Netflix might consider advertising on its platform.

“The U2 song’s lyrics go ‘it’s all right, it’s all right, all right, she moves in mysterious ways,’” said the CEO, who didn’t want to be named. “You have to be all right with shares reacting to a different set of data points because it’s leading a relatively still emerging business.”

Investors sent shares of Netflix up 2% on Tuesday, to $344.74, early Tuesday ahead of the earnings release. The share price, which topped $700 last November, has dropped 44% since the start of the year. Overall, Netflix is expected to post earnings of $2.91 per share on revenue of $7.95 billion, which would be higher than the year-ago period.

For the uninitiated, Netflix headlines in the financial press can be confusing. A year ago, Barron’s ran a story that summed up the issue: “Netflix Beat Earnings Expectation. Why its Stock is Tumbling.” And in January, one analyst speculated: “Netflix stock may be dead money.” Just last week, MarketWatch weighed in with a Hollywood-influenced take: “After its own Oscars slap and Wall Street smackdown, Netflix searches for a rebound.”

Netflix stopped operations in Russia on March 6, a move that analysts expect will slash a million subscribers from the platform. For context, Netflix had 222 million global subscribers at the end of 2021. The company lowered its first-quarter project for 2.5 million new customers, down from the 3.8 million picked up in the year-ago period.

The streaming giant has come under pressure in recent years to expand content as it becomes a more global company. Analysts pointed out Netflix has spent heavily on content — or else you run the risk of defection to the crush of new streaming competitors.

“Our U.S. survey suggests Netflix still holds a wide lead in living room TV, even as TikTok gains mobile video viewing share,” said Jon Blackledge of Cowen & Co., who sees U.S. price increase early in the year “could slightly increase near-term churn.”

Netflix co-chief executives Ted Sarandos and Reed Hastings will likely be grilled about the company’s ability to find new customers and retain them. The company has carefully telegraphed for the better part of a decade that it will add tens of millions of customers each year as more people around the world cut the cord.

In a year-end letter to shareholders, the two leaders wrote “the greatest opportunity in entertainment is the transition from linear to streaming and that with under 10 percent of total TV screen time in the U.S., our biggest market, Netflix has tremendous room for growth if we can continue to improve our service.”

It’s just Netflix and Amazon will be fighting for every last one of those potential subscribers. Analysts believe in the next few years Wall Street will see a wave of consolidation similar to Discovery’s acquisition of Warner Bros. into Warner Bros. Discovery and Amazon’s acquisition of MGM.

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