Netflix Q4 report kicks off the year of streaming research as Hollywood and Wall Street try to see if the math can work

After pulling out of a grueling series of setbacks in the first half of 2022, Netflix will face another test on Thursday afternoon with the release of its fourth-quarter financial results.

The report will not only kick off the quarterly earnings season for media and entertainment companies, but will also usher in a year of increased focus on the streaming business. After moving mountains (and billions of dollars) to try to compete with Netflix after years of phasing out of the streaming game, media companies are still very much at the beginning of their direct-to-consumer orientation process.

“Rather than being the new bread, investors and executives have come to accept that streaming actually isn’t a good thing — at least not compared to what came before it,” MoffettNathanson analyst Robert Fishman said this week. wrote in a note to clients. “But that pre-stream era is long gone and will not return. If streaming is a mediocre business, so what? We are now in a streaming era.”

Netflix predicts it will add 4.5 million new subscribers in the quarter and reach 227.6 million subscribers worldwide. Even if it met that goal, its profit for the holiday quarter would be the smallest since 2014. The company added $8.3 million for the same period in 2021.

Programming milestones during the quarter, sure, including the quick win Wednesday, has the potential to increase subscriber numbers. But earnings are set to fall significantly year-over-year, with analyst consensus calling for earnings of 44 cents per share, down from $1.33 in the 2021 quarter. Earnings have also come under pressure, with the Wall Street consensus which rose from $7. 8 billion is only slightly up from $7.7 billion a year ago.

A key theme in the company’s most recent earnings report last October was that Netflix executives believed they were “on track to accelerate growth” after two disastrous quarters earlier this year. Yet the cost of content still weighs heavy. Netflix said it’s holding content spending steady at $18 billion a year, but for a go-go tech player, flat is the new low.

Two key topics expected to feature prominently in the letter to shareholders and the executive video interview (Netflix’s version of the traditional conference call) are password sharing and advertising. After years of ignoring, or even winking at, the practice of sharing credentials, the company has decided to no longer allow subscribers to do so for free. Co-CEO Ted Sarandos acknowledged during a December appearance at a conference hosted by UBS that the company faces some complaints. “Consumers aren’t going to like it right away,” he said, “but we have to show them why they should see value.” Many Wall Streeters see an influx of billions of dollars in new revenue if the company processes it effectively.

Similarly, advertising is widely viewed as a contributor to revenue growth, even as the overall subscription earnings curve begins to flatten. Early signs of progress from the cheaper ad-supported subscription tier — introduced last November after an impressive reversal of the company’s longtime anti-ad stance — are that traction is minimal. From a financial standpoint, the mid-quarter launch in 12 territories was never expected to turn the quarter around, but many ears will be listening intently to early descriptions of the effort.

Eric Sheridan, a veteran tech industry analyst at Goldman Sachs, described the launch of Netflix’s $7-a-month subscription business as “tentative” at best. In a note to clients, he questioned the extent of the upside from the effort. “We expect a large number of big brand advertisers to take up the offer, but that’s it
The current framework (large minimum stakes, above industry pricing and limited measurement) may limit advertising opportunities (lack of broader user base, greater measurement/attribution),” he wrote. “Furthermore, we remain concerned that additional subscription offers could lead users to switch to the lowest priced plans over the next 6 to 12 months in a potential consumer recession.”

Sheridan considers Netflix a “show me stock” and ranks shares a “sell.” The opposite view is from Cowen & Co. says John Blackledge, who sees a “huge publicity opportunity” as a catalyst for stocks. In a Cowen survey, Blackledge said a third of digital ad buyers said they plan to buy space on Netflix.

Netflix still has long-term growth potential, Blackledge says, with incremental profit margins of 80% to 85%.

An investment company that has been known as a Netflix bear for years, Wedbush Securities, has turned into a bull. In a report this week, Alicia Reese and Michael Pachter argue that the company is “well positioned in this grim environment where streamers are shifting strategy and should be valued as a highly profitable, slow-growth company.”

So far this year, investors seem poised to buy into the Netflix narrative. The company’s shares are up nearly 13% year-to-date in 2023 to close at $326.33 today.