ENTERTAINMENT

Netflix is in rough shape. This week will determine its future

Jul 18, 2022, 8:49 AM

BY FRANK PALLOTTA AND NICOLE GOODKIND, CNN BUSINESS
CNN

(CNN) — Netflix, once a darling of Wall Street, is suddenly on the ropes.

The streaming giant will report its second-quarter earnings on Tuesday, and it’s shaping up to be one of the most consequential moments in the 25-year history of the company.

Netflix is having a terrible year. In April, the company reported that it had lost subscribers in the first quarter of 2022 — the first time that had happened in any quarter for more than a decade. Netflix’s stock subsequently burst into flames (it’s currently down about 70% so far this year), wiping out billions of dollars in market value, and the company laid off hundreds of employees.

The loss of subscribers wasn’t the only problem that caused Netflix’s world to be turned upside down like the kids on “Stranger Things.” A weak outlook for the second quarter shocked investors: Netflix predicted it would lose another 2 million in the spring.

Whatever happens Tuesday could reshape the future of the company as well as the entire streaming sector. As goes Netflix, so goes streaming.

“There will be hell to pay if they report a number that is significantly higher than the 2 million loss being thrown around,” Andrew Hare, a senior vice president of research at Magid, told CNN Business.

The streaming market has matured and saturated, Hare noted. So investors will be asking: “What’s next and where is the growth going to come from?”

Netflix is pinning its hopes on potential savior: advertising.

The company announced Wednesday that it will partner with Microsoft on a new, cheaper ad-supported subscription plan. Despite Reed Hastings, Netflix’s CEO, being allergic to the idea for years, advertising is now a major part of Netflix’s plans to boost revenue going forward. The new tier will reportedly come before the end of 2022, but Netflix admits its nascent ad business is in its “very early days.”

The company is also focusing on clamping down on password sharing and focusing on creating compelling content to help turn the tide.

But will any of that matter if Tuesday’s numbers are so lackluster that Wall Street fully turns its back on Netflix?

“Once Netflix becomes heavily undervalued by the market, all bets are off,” Hare said.

The streamer does have some things working in its favor, however.

For starters, it’s still Netflix — the streaming leader with 221.6 million subscribers worldwide. It’s also reporting numbers in a marketplace that’s presenting factors out of Netflix’s control, such as soaring inflation. So it has those excuses it can rely on to possibly soften the blow with investors.

“Investors will give them time to right the ship but they need to hear more solid plans about the path towards immediate growth,” Hare said. “It’s all about communicating how they are evolving the business to ensure they continue to win in streaming… No one has the stomach for a business losing millions of subscribers every quarter.”

Wall Street CEOs grapple with the ‘R’ word

Big banks kicked off earnings season last week, placing executives in front of investors and members of the media for questioning.

The rapport was fairly predictable: Bank execs want to discuss things like net interest margin and credit reserve builds. Everyone else had one thing on their mind: Recession.

There’s no denying that the economy is the story and investors believe that banking titans are co-authors. They want to know what happens next.

So here’s what we’ve gleamed so far about the state of the economy to come.

JPMorgan CEO Jamie Dimon:

Geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.

Morgan Stanley CEO James Gorman:

We might head into some form of recession — and I, like many of others, have tried to handicap it, but we are frankly guessing at this stage, but I think it’s unlikely to be a deep and dramatic recession at least in the U.S. I think Asia is a little behind. It depends how COVID rolls out, and it’s sort of reemerging a little bit in some countries. And then Europe is obviously — is fighting the hardest right now because of the war in the Ukraine, because of the pressure on gas and gas prices and so on.

First Republic Bank CEO and founder Jim Herbert:

The Fed has to play catch up. They’re behind and they’re doing — they’re likely to do so pretty quickly. So I think you’re likely to see the recession is probably coming of some kind, and it will stabilize a lot of the excesses. I don’t think that it’s threatening overly to us… I think we’re in maybe the second or third inning of what’s going to be required to get inflation under control. That would be my personal opinion.

BNY Mellon president and CEO-elect Robin Vince:

You’ve all seen those charts. The S&P 500 had its worst first half performance in over 50 years, 10-year Treasury had the worst start to the year since the beginning of the Index in the early 1970s. And with 150 basis points in rate hikes, this is the fastest tightening cycle over six months since the Volcker era at the end of the 1970s. Underneath these headlines, what we’re seeing across our platforms is that investors are clearly rebalancing and de-risking. We’re seeing asset reallocation from growth to value, higher than expected cash balances, and relatively shallow market liquidity, making it harder for investors to move risk.

Wells Fargo CEO Charles Scharf:

You’re really looking at a number of scenarios that you need to be thoughtful about and include in your modeling. And for a number of quarters in a row, we have had a significant weighting on the downside scenario already. And some of those scenarios are pretty severe, right? And so you’ve got weightings on what some might term wild recession, more severe recessions, so you could create a lot of labels for them. But it’s a number of scenarios that have different severities of downside.

Citigroup CEO Jane Fraser:

While sentiment has shifted, little of the data I see tells me the U.S. is on the cusp of a recession. Consumer spending remains well above pre-Covid levels with household savings providing a cushion for future stress. And as any employer will tell you, the job market remains very tight.

I’m just back from Europe, where it’s a different story. We expect a very difficult winter is coming, and that’s due to disruptions in the energy supply. There is also increasing concern about second order effects on industrial production and how that will affect economic activity across the continent. And the mood is, of course, further darkened by the belief that the war in Ukraine will not end anytime soon.