Netflix is in rough shape. This week will determine its future
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Frank Pallotta and Nicole Goodkind, CNN Business
(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.”
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