Streaming giant Netflix (NFLX, Financial) remains in serious trouble ahead of its upcoming second-quarter results. The past few quarters have been rough, and most analysts expect more of the same as it tackles increased subscriber churn. Netflix is a tad too late in innovating its subscription offerings while the current macro-economic headwinds continue to impact consumer discretionary spending. Hence, I believe it's best to avoid the trap of buying the dip with Netflix and instead watch it from the sidelines.
The likely outcome is that its upcoming results will be another downer for its investors. The market isn't hopeful of a turnaround anytime soon, as the chances of revenue and earnings misses remain incredibly high. However, the market hopes the company could achieve stronger sales growth and improvements in profitability starting from 2024. That's perhaps too bullish of an assumption, as Netflix has yet to prove that it could deliver on its ad-supported tier and other initiatives.
Second-quarter results likely to be a downer
Netflix has been struggling with subscriber churn over the past few quarters, which is likely to impact its upcoming results. I curated a list of projections from some leading market analysts; most expect another lackluster quarterly performance. The consensus is that Netflix's revenue growth on a year-over-year basis should slow down from 19.4% in the second quarter of 2021 to just 9.6% this year's second quarter. Moreover, the expectation is that its non-GAAP adjusted earnings per share will narrow from $3.53 in the first quarter of 2022 to $2.97 in the upcoming quarter.
The consensus results are plausible considering the challenges faced by the streaming giant at this time. I'd expect it to roughly meet market estimates for its revenues and earnings or miss them by a fair margin. It has faced too many variables at this time, including stiff competition, elevated spending on content and cut-throat competition that will weigh in on its results for the foreseeable future. The slowdown is likely to impact its results for several quarters to come, so it's tough to feel upbeat over Netflix at this time.
A massive bump in its operating profit margins is highly dependent on a more favorable revenue mix, driven by its high-margin advertising revenues. It remains to be seen how Netflix will bounce back, and its new initiatives' success remains in the air at this point.
Outlook ahead
In April, Netflix reported a disappointing quarter, posting its first drop in subscribers in over a decade. Additionally, its management indicated that its subscribers would drop by another two million in the upcoming quarter.
Over the years, Netflix has done incredibly in growing its subscriber base, but it did so without much competition. It currently faces immense competition from many streaming options run by deep-pocketed corporate players such as Disney (DIS, Financial) and Amazon (AMZN, Financial). Disney alone spent over $25 billion compared to Netflix's $17 billion in producing original content last year.
Perhaps the biggest advantage for the companies mentioned above is that they can effectively subsidize production costs on the back of other profitable business segments. Netflix doesn't have that option. For instance, Disney could effectively offset the production costs from its streaming services against its theme parks and merchandising businesses. Therefore, Netflix has no other option but to look toward belt-tightening measures. It recently cut its workforce by 2% and canceled multiple projects pursuing a more pragmatic approach.
Bottom line on Netflix stock
A lot hangs in the balance for Netflix as it looks to restart its growth engine. Over the years, it's been an incredible wealth compounder. Still, the growing competition in the space and its ineffectiveness in managing its in-house problems are points of major concern. Over the long-term, it could potentially deliver big for its investors, but at this time, it's tough to jump up on its bandwagon. We currently have seen no evidence that Netflix's turnaround plans will work yet.
