Two Ways Netflix Earnings Could Draw Cheers - Beyond the Results

Netflix's upcoming financial report on Thursday will undoubtedly attract attention for its subscriber growth and financial metrics, but there are two key strategies that could also please Wall Street.

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First, Netflix might discuss potential future price hikes. The company has shifted its focus from simply growing its subscriber base to increasing revenue from existing users. Recently, Netflix has cracked down on password sharing, requiring users to either get their own memberships or pay for additional accounts if they were previously borrowing from someone outside their household. The company also raised prices on some plans last fall and introduced an advertising tier to capture revenue from more budget-conscious viewers.

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“We believe further price hikes are in the cards,” stated Monness, Crespi, Hardt & Co. analyst Brian White.

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Another aspect to watch is the possibility of a stock split, following the trend set by companies like Nvidia and Broadcom. With Netflix's shares trading near $650, a split could make the stock more accessible to retail investors. Steve Sosnick, chief strategist at Interactive Brokers, noted that Netflix is an "expensive stock with a significant retail following."

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Stock splits have generated considerable investor enthusiasm recently, especially with Nvidia's shares performing well between the announcement and the completion of its split.

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Regarding Netflix's actual results, this quarter is one of the few remaining opportunities to speculate on the company’s subscriber numbers, as expectations are high. Evercore ISI analyst Mark Mahaney indicated that buy-side projections for Netflix’s second-quarter paid net additions are significantly higher than Wall Street’s estimates, with buy-side expectations around 8 million compared to the consensus of about 4 million on FactSet and 5 million on Visible Alpha.

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Mahaney cautioned against these high expectations, considering typical seasonal patterns for the second quarter, a relatively quiet content lineup aside from "Bridgerton," and the potential diminishing returns from the password-sharing crackdown initiated last year.

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Subscriber growth has been a critical metric for Netflix investors, but this will change soon. Netflix announced it would stop quarterly disclosures of subscriber numbers after this year. This move was met with skepticism from Wall Street, leading to a sharp decline in Netflix shares and concerns that the company might be anticipating weaker numbers in the future.

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Netflix defended the decision, stating that while subscriber performance was once a strong indicator of potential, the company now has more relevant financial metrics like substantial profit and free cash flow.

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When Netflix releases its earnings on Thursday afternoon, investors will be looking to see if initiatives like the password-sharing crackdown and the advertising push are yielding financial benefits.

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“Ultimately what investors will consistently be interested in is whether or not the company beats expectations on the top line and bottom line. How they achieve that profit isn’t as important,” Melissa Otto, an analyst at S&P Visible Alpha TMT, told MarketWatch. “They just want to see that the company is evolving in a way that will continue to reward shareholders.”

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Revenue for the second quarter is expected to rise to $9.5 billion from $8.2 billion, with adjusted earnings per share anticipated to increase by 44% to $4.74. Analysts tracked by FactSet also project free cash flow of $1.6 billion, up from $1.3 billion a year ago.

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Wall Street will also be watching for signs of future monetization strategies. Piper Sandler analyst Matt Farrell noted that Netflix has been more strategic with price increases recently, as subscriber growth has been the primary driver of revenue. However, with an upcoming content slate that includes several high-profile shows, there is speculation about potential price hikes in the near future.

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Additionally, the financial progress of Netflix’s advertising business will be under scrutiny, especially following recent demand-side platform announcements and the upfronts, where advertisers commit to future campaigns.

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“We await potential commentary on Netflix retiring its U.S. basic plan completely, as well as any updates the company may provide on its ad tier and its ad-tech partners,” added Macquarie analyst Tim Nollen, although he doubted that the ad business had a significant impact in the second quarter.

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Netflix shares have risen 35% this year, and investors are keen to see if the company's strategies will continue to drive growth and profitability in the coming quarters.

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