Investor Alert

Earnings Outlook

Jan. 20, 2022, 8:34 a.m. EST

As Wall Street braces for Netflix subscriber-growth miss, some want the company to stop reporting the number

By Jon Swartz

Netflix Inc. is basking in record viewership numbers for “Don’t Look Up,” a climate-change satire that has been the biggest hit yet for its film ambitions, but its coming earnings report is causing fears of a stock move best described as Don’t Look Down.

At least one Wall Street analyst, JPMorgan’s Doug Anmuth, is anticipating some unsightly numbers when Netflix reports fourth-quarter earnings on Jan. 20. He expects 6.25 million additions — more than 2 million shy of the 8.5 million that Netflix (NAS:NFLX) and analysts had forecast three months ago. That prediction has helped push the average analyst projection of Netflix’s subscriber additions below Netflix’s forecast, to 8.41 million from a previous 8.63 million, according to FactSet.

Read more: Netflix could report 2 million fewer subscribers than expected, analyst warns

Netflix may have tipped its hand Friday, when it announced price hikes in the U.S. and Canada for the second time during the COVID-19 pandemic . The standard plan in the U.S. will increase to $15.49 a month from $13.99, with the basic plan moving to $9.99 from $8.99 and the Premium plan increasing to $19.99 from $17.99. In Canada, the standard plan will reportedly increase to C$16.49 from C$14.99.

Netflix’s stock usually moves after each quarterly earnings report based on subscriber additions and the company’s forecast for new subscribers because it is generally considered the best barometer of future sales and earnings growth for the subscription-based streaming service. The introduction of new prices could offset any disappointment from declining subscriber growth, and Netflix’s stock jumped after the new prices were revealed Friday afternoon .

Wall Street has other ideas for how to avoid volatility based on subscriber growth, however. At least two analysts have suggested recently that Netflix move away from reporting on subscriber growth completely, as the obsession with net subscription additions could overshadow a quarter in which Netflix is expected to meet or exceed the revenue and earnings estimates of analysts and the company itself.

“Given Wall Street’s concerns that Netflix will fall short of its 4Q:21 paid global streaming net add guidance of 8.5 million, we believe it is timely for the company to consider shelving this metric altogether, one that was useful in the younger days of the service but has since become more of burden than a benefit,” Monness Crespi. Hardt analyst Brian J. White wrote in a Jan. 10 note.

The reliability of subscriber data, such as app downloads and active users, to predict Netflix subs may be becoming less useful due to its context neutrality, Barclays analyst Kannan Venkateshwar said in a Jan. 12 note .

Opinion: When the going gets tough, Apple hides its numbers

The most important piece of context is the addition of a posse of new streaming services from media giants such as Apple Inc. AAPL , Walt Disney Co. DIS , AT&T Co. T , Amazon.com Inc. AMZN , Comcast Corp. CMCSA , and ViacomCBS Inc. VIAC . In a Jan. 13 note, Michael Nathanson of MoffettNathanson believes two recent entrants to the videogaming market, Comcast’s Peacock and CBS’s Paramount+, will post the most net additions in the U.S. during the fourth quarter.

Nonetheless, he predicts Netflix will add 8.6 million subscribers in the fourth quarter, down from the 9.6 million he previously predicted.

“We believe that there is still more downside pressure to come in 2022 and are lowering our target price by $5 to $460,” Nathanson wrote. “In other words, don’t look up, look down.”

Netflix did not respond for comment on what earnings metrics it intends to continue reporting.

What to expect

Earnings:  Analysts on average expect Netflix to report earnings of 83 cents a share, down from $1.74 a share a year ago. Netflix executives forecast earnings of 80 cents a share in October, while warning that profitability will take a hit from a wave of new programming, which Netflix records costs when the content begins to air.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are more optimistic, projecting earnings of $1.00 a share on average.

Revenue:  Analysts on average expect Netflix to report $7.71 billion in fourth-quarter revenue, up from $6.44 billion a year ago. Netflix guided for revenue of $7.71 billion, and Estimize contributors predict $7.75 billion on average.

Stock movement:  Netflix’s stock is up 5.5% the past 12 months, while the S&P 500 index   SPX  has increased 24%. Shares of Netflix are down 17% since the company last announced quarterly results.

What analysts are saying

Despite some hand-wringing over Netflix’s new net subscriptions, optimism remains firm for revenue and earnings thanks to a strong slate of new movies and returning TV shows in the fourth quarter. “Don’t Look Up,” was viewed for a record 152.3 million hours in a single week (Dec. 27 to Jan. 2), and Netflix said it’s the second-most-watched movie ever on the service, which is expected to have an immense presence on the award circuit this year with films such as “The Power of the Dog,” “The Lost Daughter” and “Tick, Tick… Boom.” The streaming service also launched new seasons of popular shows “The Witcher,” “Emily in Paris” and “Cobra Kai” in the quarter.

What’s worth streaming? Why Netflix isn’t the top streaming target for January

“In our view, the original content released by Netflix in 4Q:21 was unprecedented and we believe this will encourage strong engagement,” Monness Crespi Hardt analyst White wrote.

White expects the company to “approach” his fourth-quarter revenue estimate of $7.74 billion and earnings of 90 cents a share. For the current first quarter, his firm is projecting sales of $8.06 billion, up 13% year-over-year, and EPS of $3.12. Analysts polled by FactSet are forecasting $8.14 billion and $3.46, respectively.

Strong content slates are expected to help Netflix maintain its subscriber base, an important goal as it faces new competition. Evercore ISI analysts recently wrote that proprietary U.S., Germany and France surveys gave them confidence in Netflix’s popularity with subscribers, and they maintained an outperform rating and $710 price target on the stock

The U.S. sampling of 1,600 people revealed that two-thirds used Netflix in the last 12 months — comparable to record high penetration in August — and 61% said they were “extremely/very satisfied” with the service, up 5% from the previous quarter. Still, one in five said they were “extremely/very likely to cancel in the next 3 months,” a potential sign of U.S. penetration edging closer to maturation.

Don’t miss: What will streaming services bring in 2022? Here are 5 trends to watch

Not all analysts are predicting a shortfall for Netflix. Stifel analyst Scott Devitt said he expected more than 10 million new subscribers in the fourth quarter as Netflix “successfully releases compelling original content, broadens its international penetration, and enters a seasonally favorable period for sub adds.”

Link to MarketWatch's Slice.