8 months ago • 3 mins
The popular thing to watch on Netflix right now isn’t a series: it’s the streamer’s change to its business strategy. And it’s left the market in suspense. See, it used to be that Netflix prioritized gaining new subscribers at any cost, but now it’s moving toward a more profitable – and sustainable – growth strategy. That means clamping down on password sharing, adding a less-expensive pricing tier that allows advertising, and cutting prices by as much as 50% in over 100 countries.
The new strategy has had investors binging once more on Netflix: its share price has more than doubled since its low in June. And the company and Wall Street analysts alike are feeling optimistic about free cash flow – that’s what's left after all day-to-day expenses and major programming costs. They’re expecting it to come in at more than $3 billion this year – that’s double last year’s amount and a big departure from the firm’s cash-burning history.
Mind you, those strategic changes will take time to bear profit fruit. So whether Netflix misses or beats this quarter’s earnings-per-share (EPS) estimates – around $2.88 – that’s not the main thing to focus on just now. What’s more important is that Netflix doesn’t show signs of compromising on growth as it embraces profitability. It mightn’t be the go-go growth firm it once was, but at 30x price-to-earnings (P/E) it’s not exactly priced like a mature slow-grower either.
Subscriber growth will still be the No. 1 thing to look for on Tuesday when Netflix reports its earnings. Now, the streamer’s scrapped any official guidance on this stat, but management has hinted that subscribers would grow during the first quarter. And from that, Wall Street analysts have been ballparking around two million new subscribers. The chart above shows the firm’s previous four quarters of net subscriber growth (blue bars), compared to Wall Street estimates (red bars), and the share price reaction. Obviously, subscribers matter – a lot.
Now, no one has a crystal ball, and this quarter’s results will likely be even noisier than usual, given the firm’s strategic changes. But there are a few things that might give you a hint about that crucial number.
First, viewing figures. Netflix lists its top ten shows and their weekly viewership figures. The bad news is that, by my math, viewing of Netflix’s chart-toppers fell by more than 10% versus the same time last year. Now, viewing doesn’t sync perfectly with subscribers, but it’s probably at least a little bit correlated. And fewer eyeballs on Netflix’s hits might be a bad sign for subscriber numbers.
Next, lower-priced tiers. Recent news reports suggest that Netflix’s ad-supported tier is gaining some momentum. A Netflix subscription mightn’t break the bank, but plenty of folks were sharing log-in details to save a dime, so cheaper prices will be important as the password police gradually get more forceful. So the news there is pretty encouraging.
And last, Netflix is only slowly rolling out its password-sharing restrictions: those new rules are expected to drag on subscriber numbers, but a continued steady-as-she-goes approach could prop up this quarter’s subscriber numbers too.
Overall, then, there are reasons to be optimistic and reasons to be wary, and it’s anyone’s guess which way this will go. But look: Netflix’s future doesn’t hinge on one quarter’s subscriber figures, so listen carefully to what the management says about how all its new tactics are going. Remember, Netflix is aiming for long-term profitable growth and it’s bound to hit some plot twists along the way. You’ll want to keep that in mind if its stock price plunges on Wednesday, as it could be an opportunity for longer-term thinkers.
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