NOTetflix (NFLX), a covid-darling stock, has lost 70% of its value this year, and its earnings report will be out next week. The question for many investors and traders is whether now is a good time to buy NFLX stock; this can be answered by reviewing some critical factors in its earnings report.
2022 has been a rough year for Netflix, but the stock is off its low of $165, formed on May 5 (the stock had peaked at $700 in November 2021). Investors punished the stock even more when the streaming giant posted its first drop in subscriber numbers during last quarter earnings. The company expected nearly 2.5 million new subscribers in the first quarter of this year, but actual results confirmed the streaming company had lost nearly 200,000 subscribers. Its outlook was further impacted when management indicated that Netflix could lose around 2 million subscribers in the second quarter of 2022.
Netflix blamed many reasons behind its subscriber outlook, such as rising inflation, supply chain issues, eroding sending power and password sharing. The unattractive growth outlook prompted Netflix to do something it had avoided for many years: introduce ads. Many market participants considered this news as another unfavorable factor influencing its growth, as Netflix came into the market to improve user experience at a time when TV and movie advertisements were driving users away.
However, I think investors should revisit Netflix stocks, as most of the bad news may have already been priced in.
What to watch during winnings?
First of all, it will be subscribers. Investors and analysts will focus their attention on subscriber numbers first, especially if co-chief executive Reed Hastings provides projections for the third quarter and beyond. Any indication that the company can slow the bleeding or even sign up new users will be seen as good news. It will also be worth looking at how Netflix handles the password sharing issue and whether it will take any steps to mitigate this issue.
Moving away from subscriber count and growth, being profitable is going to be another major focal point. In this industry, it costs a lot of money to compete, so it will be interesting to watch how Netflix manages the delicate balance between being financially prudent while investing enough to produce content that attracts and retains users.
Is the optimism justified?
There’s reason to be optimistic about Netflix’s recent announcement choosing Microsoft as an advertising partner. This may turn out to be a smart move on Netflix’s part, as it gives them access to out-of-the-box advertising solutions; if the marriage is successful, I wouldn’t be surprised to hear about Microsoft’s future purchase of Netflix.
While largely beyond Netflix’s control, supply chain issues and chip shortages are slowly easing, which should encourage a return to smart TV production and sales, which could increase the number subscribers.
In March, Netflix began rolling out a campaign to stop sharing passwords with its Latin American customers. Members will be able to add up to two non-residential viewers as sub-accounts to their current profile by offering a discounted rate as an incentive. Additionally, the company unveiled a tool that allows customers to maintain their watch history, watchlist, and personalized recommendations by transferring a current profile to a new one. All of these strategies could persuade profiteers to open a premium account.
There is no doubt that Netflix shares are extremely oversold and present a great opportunity for an investor who can bear some risk. The risk-reward ratio is excellent as Netflix is a growth title. Looking at recent price action, price has challenged its 50-day simple moving average (SMA) on several occasions now, and it is likely that we could see price break above this average. If the price breaks above the 50-day SMA and stays above this average, a new uptrend will emerge, which investors should not ignore.
In conclusion, Netflix has chosen the right advertising partner, and most of the bad news may already be priced in during its action. If there is no more unfavorable news or a new surprise like last time, we might see buyers coming back.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.